The tendency of a stock\'s price to move up and down with the market is reflecte

Question

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. In your initial response to the topic you have to answer all 5 questions. You are expected to make your own contribution in a main topic as well as respond with value added comments to at least two of your classmates as well as to your instructor. From Yahoo!Finance obtain a report on any two companies.

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.If you made 70% of dollar investment in stock A, and 30% of dollar investment in stock B, what would be the beta of your portfolio? Please show your work.

4.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.

5.Compare the required return on these stocks calculated using CAPM in question #4 against their historical return over the last 52 weeks, found in the Yahoo!Finance - Key Statistics. Is there a difference between these returns? Is this a problem? Why is there a difference?

Explanation / Answer

Answer;

1.The beta for general motor company listed under the symbol 'GM' as on march 24th,2015 is 1.07 and general mills (GIS) is 0.73

2. The portfolio beta is the beta of investments assets that an individual or organizations holds. It is used as a performance measurement for evaluating the risk of a portfolio. The beta of a portfolio as it is at a point in time is the weighted average of the betas of its element and is calculated by multiplying the percentage of each stock in the portfolio by its beta and adding up the betas. The portfolio beta with an equal percentage investment in General Motor and General mills is calculated as following:

0.50 * 1.07 + 0.50 * 0.73 = 0.9

4. Over the last 52 weeks, GE's return on equity has been 19.72%. Remember that realized returns, expected returns,and required return are all different measure.In equilibrium, expected and required returns should be equal, but they are both forward looking, while realized returns are historical.

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