Question

integrated mini-case: Disney’s Beta

When you go on the web to find a firm’s beta, you do not know how recently it was computed, what index was used as a proxy for the market portfolio, or which time series of returns the calculations used. Earlier in this chapter, it was shown that when we went on the Web to find a beta for Disney, we found the following: MSN Money (1.29) and Yahoo! Finance (1.18). An alternative is to compute beta yourself. A common estimation procedure is to use 60 months of return data and to use the S&P 500 Index as the market portfolio. You can obtain price data for a company and for the S&P 500 Index free from websites like Yahoo! Finance. Using monthly prices, you can compute the monthly returns, as (Pn – Pn−1) ÷ Pn−1. Below are 60 monthly returns for Disney and the S&P 500 Index. You can use these returns to compute Disney’s beta. A spreadsheet, like Excel, can run a regression (go to Tool menu, select Data Analysis, and then Regression). Select Disney returns as the y variable and S&P 500 Index return as the x variable. The coefficient for the x variable is the beta estimate. The regression will provide all the statistical information you might like. However, if you only want beta, you can simply use the SLOPE function in Excel. Or you may have learned to run a regression using statistical software.

LETECH 1 Date 3 2.32 1.55 6 1.91 A B Date Disney Apr 18 -0.11% Mar 18 -2.64 Feb 18 -5.07 Jan 18 1.89 Dec 17 2.57 Nov 17 7.17 Oct 17 -0.77 Sep 17 -2.60 Aug 17 -7.26 Jul 17 3.46 Jun 17 -1.57 May 17 -6.63 Apr 17 1.95 Mar 173.00 Feb 17 -0.51 Jan 17 Dec 16 | 5.15 Nov 16 6.94 Oct 16 -0.18 Sep 16 -1.69 C S&P500 0.27% -2.69 (-3.89 5.62 0.98 2.81 2.22 1.93 0.05 1.93 0.48 1.16 0.91 -0.04 3.72 1.79 1.82 3.42 -1.94 -0.12 D E Date Disney S&P500 Disney S&P500 Aug 16 -0.84% -0.129 Dec 14. 1.82% -0.42% Jul 16 -1.91 3.56 Nov 14 1.24 2.45 Jun 16 Oct 14 2.64 May 16 -3.91 Sep 14 -0.95 Apr 163.98 0.27 Aug 14 4.66 3.77 Mar 163.97 6.60.1 Jul 14 0.16 Feb 16 | 1-0.31 -0.41 2.06 Jan 16 -8.23 May 14 5.89 2.10 Dec 15 -7.39 Apr 14 0.62 Nov 15 -0.24 0.05 Mar 14 -0.92 0.69 Oct 15 11.29 8.30 Feb 14 11.29 Sep 15 0.31 -2.64 Jan 14 -3.79 -3.56 Aug 15 -14.61 -6.26 Dec 138.31 2.36 Jul 15 5.13 1.97 Nov 13 2.84 2.80 Jun 15 3.42 -2.10 Oct 136.36 4.46 May 15 | 1.05 Sep 13 6.02 2.97 Apr 15 113.65 0.85 Aug 13 -5.91 -3.1 Mar 15 0.78 -1.749 132.38 4.95 Feb 151442 5.49 UUR 130.111.50 Jan 15 -2.2013.10 May 136.38 203 -0.91 -5.07 -1.75 11 18 19 20 21 a. Compute Disney's beta using the listed returns. b. Compare your estimate with the ones found on the Web as listed. c. How different will the required returns be using these betas: Compute required return using each beta (assume that the risk-free rate is 5 percent and the market return will be 12 percent). NEDS TO TIME 54% Page 364 of 712 ^ do 7:10 PM le 4x /12/20202 wam

Answer 1

E F G H BETA 1.25927 G8 A 1 Disney 2 01-06-13 3 01-07-13 4 01-08-13 5 01-09-13 6 01-10-13 7 01-11-13 8 01-12-13 9 01-01-14 10 01-02-14 11 01-03-14 12 01-04-14 13 01-05-14 14 01-06-14 15 01-07-14 16 01-08-14 17 01-09-14 18 01-10-14 19 01-11-14 O f ic =SLOPE(B2:B59,02:059) B C D S&P500 0.11% 01-06-13 -1.50% 2.38% 01-07-13 4.95% -5.91% 01-08-13 -3.13% 6.02% 01-09-13 2.97% 6.36% 01-10-13 4.46% 2.84% 01-11-13 2.80% 8.31% 01-12-13 2.36% -4.96% 01-01-14 -3.56% 11.29% 01-02-14 4.31% -0.92% 01-03-14 0.69% -0.91% 01-04-14 0.62% 5.89% 01-05-14 2.10% 2.06% 01-06-14 1.91% 0.16% 01-07-14 -1.51% 4.66% 01-08-14 3.77% -0.95% 01-09-14 -1.55% 2.64% 01-10-14 2.32% 1.24% 01-11-14 2.45%