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Project2: Portfolio Risk and Return 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 exercise you will need to download monthly historical data of SP500 index and stocks from Yahoo! Finance, located at http://finance.yahoo.com. To find a company's historical trading information, enter the desired stock symbol and request a basic quote. Once you have the basic quote, click on “Historical Data” and you’ll see the trading prices. Choose “1Y” for time period and “monthly” for frequency. Then click on “Apply” and the data are ready to download. a. Identify the beta for a company called Denny’s Corp., stock symbol DENN. Run a regression using the close price of SP500 index and that of DENN. Please show the regression line. b. Again estimate beta of Amazon (AMZN), Caterpillar Inc. (CAT), and Waste Management (WM). Be sure to show the regression lines. Which company (or companies) has higher beta (greater than 1.0)? And which company (or companies) has lower beta (less than 1.0)? Why? c. If you made an equal dollar investment in each of the four stocks, Denny’s, JPM, GE, and Ford Motor Company, what would be the beta of your portfolio? d. Apply the Capital Asset Pricing Model (CAPM) Security Market Line to estimate the required return on General Electric stock and compare the required return against the return over the last 52 weeks, 52-Week Change, found in the Yahoo’s Finance Key Statistics for GE. Assumptions and Data: Note that you will need an estimate of the risk-free rate, kRF, and the market risk premium. Assume a 7% market risk premium and get the current yield on 10-year Treasury securities from http://www.bloomberg.com. Select the "Fixed Income" link from Bloomberg's navigation menu, then choose “US”. Use the 10-year yield on Treasury securities as the risk-free rate. Date 4/1/2017 5/1/2017 6/1/2017 7/1/2017 8/1/2017 9/1/2017 10/1/2017 11/1/2017 12/1/2017 1/1/2018 2/1/2018 3/1/2018 4/1/2018 Amazon Adj Close null 994.619995 968 987.780029 980.599976 961.349976 1105.28003 1176.75 1169.46997 1450.89002 1512.44995 1447.33997 1503.82996 SP500 Adj Close null 236.917084 237.27034 243.32811 244.038055 247.725891 254.821701 262.610535 264.443756 280.775452 270.566345 262.10025 270.190002 Amazon -0.026764 0.02043391 -0.0072689 -0.0196308 0.1497166 0.06466232 -0.0061866 0.24063897 0.04242909 -0.0430493 0.03903022 SP500 0.00149105 0.02553109 0.00291765 0.01511173 0.0286438 0.03056582 0.00698076 0.06175868 -0.0363604 -0.0312903 0.03086511 WM Adj Close null 71.321495 71.751907 73.940765 75.869232 77.010567 81.301682 80.836647 85.829552 87.947937 85.849442 83.661438 83.519997 0.00603482 0.03050592 0.02608124 0.01504345 0.05572112 -0.0057199 0.06176537 0.0246813 -0.0238607 -0.0254865 -0.0016906 Amazon Regression Statistics Multiple R 0.68720623 R Square 0.4722524 Adjusted R Square 0.41361378 Standard Error0.06522528 Observations 11 ANOVA df Regression Residual Total SS MS F Significance F 1 0.03426276 0.03426276 8.05360681 0.01947015 9 0.03828903 0.00425434 10 0.07255179 Coefficients Standard Errort Stat P-value Lower 95% Upper 95% Intercept 0.01576694 0.02162271 0.72918422 0.48443179 -0.033147 0.0646809 X Variable 1 2.0597967 0.72582036 2.83788774 0.01947015 0.41787697 3.70171643 CAT 103.573059 105.567307 111.942993 116.253777 123.397812 134.371124 140.497879 156.851974 162.027954 154.630005 147.380005 153.309998 DENN 0.01925451 0.06039451 0.03850874 0.06145207 0.08892631 0.04559577 0.11640101 0.03299914 -0.0456585 -0.0468861 0.04023608 11.9 11.77 11.36 11.96 12.45 13.07 13.55 13.24 14.99 15.04 15.43 16.610001 -0.0109244 -0.0348343 0.0528169 0.0409699 0.0497992 0.03672533 -0.0228782 0.13217523 0.00333556 0.02593085 0.07647447 Covariance(SP500, 0.00166341 Amazon) Variance(SP500) 0.00080756 Beta of Amazon2.0597967 Covariance(SP500,WM) 0.00040615 Beta of WM 0.50292986 Covariance(SP500,CAT) 0.00086799 Beta of CAT 1.07483744 Covariance(SP500,DENN) 0.00075185 Beta of DENN 0.93101718 0.0006835 Function of LINEST 0.00073414 0.93101718 Lower 95.0% -0.033147 0.41787697 Beta from Yahoo Finance 1.72 0.67 1.49 0.57 0.00603482 0.03050592 0.02608124 0.01504345 0.05572112 -0.0057199 0.06176537 0.0246813 -0.0238607 -0.0254865 -0.0016906
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