EVALUATION OF PORTFOLIO BETA AND THE REQUIRED RETURN ON STOCK
The tendency of a stock’s price to move up and down with the market is reflected in its beta coefficient. Therefore, beta is a measure of an investment’s market risk, and is a key element of the CAPM.
In this part of the project, you get financial information using Yahoo!Finance (found athttp://finance.yahoo.com/ )
To find a company’s beta, enter the desired stock symbol and request a basic quote. Once you have the basic quote, select the “Key Statistics“. Scroll down this page to find the stock’s beta.
From Yahoo!Finance obtain a report on any two companies
- What are the betas listed for these companies?
- If you made an equal dollar investment in each stocks what would be the beta of your portfolio?
- Apply the Capital Asset Pricing Model (CAPM) Security Market Line to estimate the required return on these two stocks. Assumptions and Data: Note that you will need the risk-free rate and the market risk premium. Assume a 5% market risk premium. To get the current yield on 10-year Treasury securities go to Finance!Yahoo’s (www.finance.yahoo.com) -click on Market Data – Bonds. You will use the current yield on 10-year Treasury securities as the risk-free rate to estimate the required rate of return on stocks.
- Compare the required return on these stocks calculated using CAPM in question #3 against their historical return over the last 52 weeks, found in the Yahoo!Finance Profile. Is there a difference between these returns? Is this a problem? Why is there a difference?