The beta of a stock is found by running a regression with the monthly return on a
Question:
a. Explain why most stocks have a positive beta.
b. Explain why a stock with a beta with absolute value greater than one is more volatile than the market index and a stock with a beta less than one (in absolute value) is less volatile than the market index.
c. Use the data in the file P10_45.xlsx to estimate the beta for each of the four companies listed: Caterpillar, Goodyear, McDonalds, and Ford. Use the S&P 500 as the market index.
d. For each of these companies, what percentage of the variation in its returns is explained by the variation in the market index? What percentage is unexplained by variation in the market index?
e. Verify (using Excel’s COVAR and VARP functions) that the beta for each company is given by
Covariance between Company and Market / Variance of Market
Also, verify that the correlation between each company’s returns and the market’s returns is the square root of R2.
Stocks
Stocks or shares are generally equity instruments that provide the largest source of raising funds in any public or private listed company's. The instruments are issued on a stock exchange from where a large number of general public who are willing...
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Related Book For
Data Analysis and Decision Making
ISBN: 978-0538476126
4th edition
Authors: Christian Albright, Wayne Winston, Christopher Zappe
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