Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

One measure of the risk or volatility of an individual stock is the standard deviation of the total return (capital appreciation plus dividends) over several

One measure of the risk or volatility of an individual stock is the standard deviation of the total return (capital appreciation plus dividends) over several periods of time. Although the standard deviation is easy to compute, it does not take into account the extent to which the price of a given stock varies as a function of a standard market index, such as the S&P 500. As a result, many financial analysts prefer to use another measure of risk referred to as beta.Betas for individual stocks are determined by simple linearregression. The dependent variable is the total return for the stockand the independent variable is the total return for the stockmarket. For this case problem we will use the S&P 500 index asthe measure of the total return for the stock market, and anestimated regression equation will be developed using monthly data. The beta for the stock is the slope of the estimated regression equation . The data contained in the WEBfile named Beta provides the total return (capital appreciation plus dividends) over 36 months for eight widely traded common stocks and the S&P 500.The value of beta for the stock market will always be 1; thus, stocks that tend to rise and fall with the stock market will also have a beta close to 1. Betas greater than 1 indicate that the stock is more volatile than the market, and betas less than 1 indicate that the stock isless volatile than the market. For instance, if a stock has a beta of 1.4, it is 40%morevolatile than the market, and if a stock has a beta of .4, it is 60%lessvolatile than the market.

You have been assigned to analyze the risk characteristics of these stocks. Prepare a report that includes but is not limited to the following items.

(a) Microsoft Exxon Mobil Caterpillar Johnson & Johnson McDonald's Sandisk Qualcomm Procter & Gamble S&P 500
n
Mean
Std Dev
Min
Median
Max
(b) Microsoft Exxon Mobil Caterpillar Johnson & Johnson McDonald's Sandisk Qualcomm Procter & Gamble S&P 500
Beta
(c) Microsoft Exxon Mobil Caterpillar Johnson & Johnson McDonald's Sandisk Qualcomm Procter & Gamble S&P 500
r2
Month Microsoft Exxon Mobil Caterpillar Johnson & Johnson McDonald's Sandisk Qualcomm Procter & Gamble S&P 500
Jan-03 -0.08201 -0.02261 -0.0304 -0.00186 -0.11443 -0.24867 0.0349 0.000465 -0.027415
Feb-03 0.00211 0.00293 0.06867 -0.01781 -0.04424 0.09363 -0.08178 -0.043356 -0.017004
Mar-03 0.02152 0.02734 0.04681 0.10334 0.06245 0.00839 0.04251 0.087833 0.008358
Apr-03 0.05576 0.00715 0.07622 -0.02609 0.18257 0.43876 -0.11444 0.013588 0.081044
May-03 -0.03717 0.04119 -0.00856 -0.03141 0.09532 0.50165 0.05395 0.021925 0.050899
Jun-03 0.04185 -0.01346 0.06731 -0.04876 0.17779 0.1164 0.07124 -0.028752 0.011322
Jul-03 0.03003 -0.00919 0.21847 0.00174 0.04306 0.39734 0.04285 -0.009587 0.016224
Aug-03 0.00417 0.06661 0.06462 -0.03804 -0.02564 0.06633 0.10459 -0.006601 0.017873
Sep-03 0.04827 -0.02918 -0.04163 -0.00121 0.04996 0.05409 0.00823 0.063352 -0.011944
Oct-03 -0.05396 -0.00055 0.06987 0.01636 0.06202 0.26491 0.13967 0.063833 0.054962
Nov-03 -0.01645 -0.00355 0.0378 -0.0157 0.0412 0.00273 -0.06043 -0.020857 0.007129
Dec-03 0.06457 0.1326 0.09165 0.04787 -0.03121 -0.24276 0.21055 0.037822 0.050765
Jan-04 0.01023 -0.00512 -0.05444 0.03407 0.03665 -0.11275 0.08678 0.01657 0.017276
Feb-04 -0.04051 0.03996 -0.03046 0.01367 0.09946 -0.06372 0.07763 0.014147 0.012209
Mar-04 -0.06031 -0.01375 0.04383 -0.05917 0.00954 0.11566 0.05072 0.02312 -0.016359
Apr-04 0.04813 0.02308 -0.01227 0.06526 -0.0469 -0.18371 -0.05778 0.013063 -0.016791
May-04 0.00383 0.0228 -0.03062 0.03637 -0.03048 0.06479 0.07541 0.019574 0.012083
Jun-04 0.08883 0.02682 0.05428 -0.00018 -0.01515 -0.12008 0.08812 0.009831 0.017989
Jul-04 -0.00245 0.04256 -0.06974 -0.00772 0.05769 0.12125 -0.05166 -0.037472 -0.034291
Aug-04 -0.03896 0.00151 -0.01075 0.05636 -0.01745 -0.03988 0.10157 0.07325 0.002287
Sep-04 0.01282 0.04837 0.1066 -0.03046 0.03738 0.24711 0.02602 -0.033053 0.009364
Oct-04 0.01157 0.01842 0.00622 0.03639 0.03996 -0.28331 0.06557 -0.049704 0.014014
Nov-04 0.06864 0.04673 0.1367 0.03811 0.07341 0.08194 0.00048 0.044939 0.038595
Dec-04 -0.00336 0.0002 0.0651 0.05139 0.04294 0.10585 0.02042 0.029918 0.032458
Jan-05 -0.01647 0.00663 -0.08204 0.02018 0.01029 -0.01081 -0.1217 -0.029049 -0.02529
Feb-05 -0.03957 0.23217 0.06678 0.01832 0.0213 0.08826 -0.03008 -0.00263 0.018903
Mar-05 -0.03935 -0.0586 -0.03798 0.02378 -0.05865 0.03423 0.01609 -0.001695 -0.019118
Apr-05 0.04675 -0.04312 -0.03259 0.02189 -0.05877 -0.14748 -0.0475 0.026981 -0.020109
May-05 0.02292 -0.00947 0.06882 -0.01749 0.05561 0.09578 0.07079 0.018467 0.029952
Jun-05 -0.03721 0.0226 0.01275 -0.0313 -0.1031 -0.08625 -0.1143 -0.043518 -0.000143
Jul-05 0.031 0.02227 0.1365 -0.016 0.12324 0.4252 0.196 0.059905 0.035968
Aug-05 0.07224 0.02451 0.02931 -0.00375 0.04107 0.14814 0.00811 -0.002696 -0.011222
Sep-05 -0.06026 0.06077 0.05875 -0.00174 0.03205 0.24234 0.12692 0.071738 0.006949
Oct-05 -0.00117 -0.11646 -0.1006 -0.01043 -0.05643 0.22056 -0.11151 -0.053649 -0.017741
Nov-05 0.08016 0.03883 0.09869 -0.00862 0.0924 -0.13281 0.14361 0.021432 0.035186
Dec-05 -0.05527 -0.03205 -0.00017 -0.02672 -0.00384 0.23032 -0.05058 0.012065

-0.000952

  1. Compute descriptive statistics for each stock and the S&P 500. Comment on your results. Which stocks are the most volatile?

Calculate and paste the necessary values for the below

  1. Compute the value of beta for each stock. Which of these stocks would you expect to perform best in an up market? Which would you expect to hold their value best in a down market?
  2. Comment on how much of the return for the individual stocks is explained by the market.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

Analysis of the Risk Characteristics of Stocks Using Monthly Data Lets conduct the analysis following the given steps 1 Descriptive Statistics To comp... blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Mathematics for Economics and Business

Authors: Ian Jacques

9th edition

129219166X, 9781292191706 , 978-1292191669

More Books

Students also viewed these Mathematics questions