You will answer ALL the following questions in this topic.

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 at http://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 your firm and its closest competitor..

1. What are the betas listed for these companies?
2. If you made an equal dollar investment in each stocks what would be the beta of your portfolio?
3. 3.      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 an estimate of the risk-free rate, r_RF, the market risk premium. Assume a 5% market risk premium and get the current yield on 10-year Treasury securities from Finance!Yahoo’s  frontpage click on  Investing – Bonds.

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?

Homework and Quiz are on MYPEARSONLAB.COM

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