In this part of the project, you get financial information using Yahoo!Finance (

Question

In this part of the project, you get financial information using Yahoo!Finance (found athttp://finance.yahoo.com/) and www.money.cnn.com From Yahoo!Finance obtain a report on any two companies (Ctrl 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? Please how your work. Ifyou made 70% of dollar investment in stock A, and 30% of dollar investment in stock B, what 3. would be the beta of your portfolio? Please how your work. Apply the Capital Asset Pricing Model (CAPM) Security Market Line to estimate the required return on both stock. Note that you will need the risk-free rate and the market return. a) To get the current yield on 10-year Treasury securities go to EinancelYahoo's at www.finance.yahoo.com -click on Market Data - U.S. Treasury 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. b) Between 1926 and 2014, the compound annual rate of return of S&P; 500 is estimated a 10.5%. We will use this number as the market return. 4. c) Calculate the required return on both stock using the Capital Asset Pricing Model (CAPM) Security Market Line. Please show your work. Find on the Internet the 52-weeks change of the stock price. Compare the required return on these stocks calculated using CAPM against their historical return over the last 52 weeks. Is there a difference between these returns? Are these stock overvalued, undervalued, or properly valued? Why? In accordance with your founding, is it reasonable for the investor to buy any of these 5. stocks? Explain your answers.

Explanation / Answer

1)

LET US ASSUME THE TWO COMPANIES ARE

FACEBOOK & AMAZON

BETA(FACEBOOK)=0.56

BETA(AMAZON) = 1.42

2)

The beta of a portfolio is the weighted sum of the individual asset betas, According to the proportions of the investments in the portfolio.

example

If 50% of the money is in stock A with a beta of 2.00(assumed), and 50% of the money is in stock B with a beta of 1.00(assumed),

beta of portfolio = beta of stock A + beta of stock B

Beta of portfolio = (50%*2.00)+(50%*1.00)

Beta of portfolio = 1.00+0.50 = 1.50

3

As per the given conditions of question

If 70% of dollar investment is made in stock A (Facebook) & 30% of dollar investment is made in stock B ( amazon)

then

Beta of portfolio = Beta of stock A (facebook) + Beta of stock B ( amazon)

Beta of portfolio = (70%*0.56)+(30%*1.42)

Beta of portfolio = 0.392+ 0.426 = 0.818

4)

CAPITAL ASSET PRICING MODEL

rate of return ( r ) = risk free rate + Beta( market return - risk free return)

r = 2.32 + 0.818(10.5%- 2.32)

r =2.32 - 1.69

r = 0.63

5)

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