QUMT 6303 Case Study Measuring Stock Market Risk

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 linear regression. The dependent variable is the total return for the stock and the independent variable is the total return for the stock market. For this case problem we will use the S&P 500 index as the measure of the total return for the stock market, and an estimated regression equation will be developed using monthly data. The beta for the stock is the slope of the estimated regression equation (b1). The data contained in the file 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 is less volatile than the market. For instance, if a stock has a beta of 1.4, it is 40% more volatile than the market, and if a stock has a beta of .4, it is 60% less volatile than the market.

Managerial Report

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

B (30 points). 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?

C (40 points). Comment on how much of the return for the individual stocks is explained by the market.

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	-0.02742
Feb-03	0.00211	0.00293	0.06867	-0.01781	-0.04424	0.09363	-0.08178	-0.043356	-0.017
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	-0.01194
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	-0.01636
Apr-04	0.04813	0.02308	-0.01227	0.06526	-0.0469	-0.18371	-0.05778	0.013063	-0.01679
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	-0.03429
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	-0.01912
Apr-05	0.04675	-0.04312	-0.03259	0.02189	-0.05877	-0.14748	-0.0475	0.026981	-0.02011
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	-0.00014
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	-0.01122
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	-0.01774
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	-0.00095