Question

From Yahoo!Finance obtain a report on Macy and Nordstrom. 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? Please show your work. 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 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 Finance!Yahoo’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. 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 stocks? Explain your answers.

Answer 1

beta = cov(ri.rm) / var(rm) where
stock return ri = (stock price at today / stock price one year back)-1
market return rm = (index at today / index at one year back)-1
E(ri) = arithmetic mean of stock returns over the year
E(rm) = arithmetic mean of market returns over the year
covariance cov (ri,rm) = sum [ri-E(ri))*(rm-E(rm))]/count(ri-E(ri))*count(rm-E(rm))
variance var(rm) = sum[(rm-E(rm))^2]/count(rm-E(rm))^2

Beta of Macy using the above formula = 1.36

Beta of NordStrom using the above formula = 1.22