Task $2$: Return, Risk and Beta$(10$ points$)$

Suppose, you have just begun working for an investment firm called Covili and Wyatt. Paul Covili, one of

the firm's founders, has been talking to you about the firm's investment portfolio. As with any investment,

Paul is concerned about the risk of the investment as well as the potential return.

The company wants you to build a diversified portfolio which contains two stocks.

Covili and Wyatt currently uses a commercial data vendor for information about its positions.

Because of this, Paul is unsure exactly how the numbers provided are calculated. The data provider

considers its methods proprietary, and it will not disclose how stock betas and other information are

calculated. Paul is uncomfortable with not knowing exactly how these numbers are being computed and

also believes that it could be less expensive to calculate the necessary statistics in$-$house. To explore this

question, Paul has asked you to do the following assignments.

Questions:

$1.$ Using monthly data for the last $5$ years calculate the average monthly returns and standard

deviations for the two stocks in your portfolio, Three$-$month Treasury Bill, and S&P $500.$

$2.$ Use the market model to estimate the beta for the two stock you select by using the last $5$ years

risk premiums. Then, estimate the annual required return for each stock based on CAPM using

the estimated betas, the average market risk premium and the average risk$-$free rate.

$3.$ What is the beta shown in $$Yahoo Finance$$ for each stock? How different is it from your

estimated beta?

$4.$ What is your portfolio beta and expected portfolio return? $($You can assign the weight for each

stock as you like.$)$