(PLEASE ANSWER ALL QUESTIONS - THANKS IN ADVANCE)

The Beta for Colgate-Palmolive Joey Moss, a recent finance graduate, has just begun his job with the investment firm of Covili and Wyatt. Paul Covili, one of the firms founders, has been talking to Joey about the firms investment portfolio.

As with any investment, Paul is concerned about the risk of the investment as well as the potential return. More specifically, because the company holds a diversified portfolio, Paul is concerned about the systematic risk of current and potential investments. One such position the company currently holds stock in Colgate-Palmolive (CL). Colgate-Palmolive is the well- known manufacturer of consumer products under brand names such as Colgate, Palmolive, Softsoap, Irish Spring, Ajax, and others.

Covili and Wyatt currently uses a commercial data vendor for information about its positions. Because of this, Paul is unsure exactly how the numbers provided are calculated. The data provider considers its methods proprietary, and it will not disclose how stock betas and other information are calculated. Paul is uncomfortable with not knowing exactly how these numbers are being computed and also believes that it could be less expensive to calculate the necessary statistics in-house. To explore this question, Paul has asked Joey to do the following assignments.

Data

Go to finance.yahoo.com and download the ending monthly stock prices for Colgate-Palmolive between starting from December 2015 to December 2020 (including). Use the adjusted closing price, which adjusts for dividend payments and stock splits.

Next, download the ending value of the NYSE index overthe same period.

Finally, for the historical risk-free rate, go to the St. Louis Federal Reserve website and download the three-month Treasury bill secondary market rate (https://fred.stlouisfed.org/series/TB3MS).

Questions 1.

Compute the monthly returns, average monthly returns, and standard deviations for ColgatePalmolive stock, the three-month Treasury bill, and the S&P 500 for this period.

2. Beta is often estimated by linear regression. A model commonly used is called the market model, which is: Rit Rft = i + i [Rmt Rft] + it In this regression equation, Rit is the return on the stock i and Rft is the risk-free rate for the same period. Rmt is the return on a stock market index such as the S&P 500 index; i is the regression intercept; i is the slope (and the stocks estimated beta); and it represents the residuals for the regression. The intercept, , is often called Jensens alpha. What does Jensens alpha measure? What is the financial interpretation of the residuals in the regression?

3. Use the market model to estimate the beta for Colgate-Palmolive using the last 36 months of returns (the regression procedure in Excel is one easy way to do this). Plot the monthly returns on Colgate-Palmolive against the S&P 500 index and also show the fitted line.

4. When the beta of a stock is calculated using monthly returns, there is a debate over the number of months that should be used in the calculation. Rework the previous question (Question 3) using the last 60 months of returns. How does this answer compare to what you calculated previously?

5. Compare your beta for Colgate-Palmolive to the beta you find on finance.yahoo.com. How similar are they? Why might they be different?