Risk and Return using EXCEL
Use the following data to explore the return-risk relation and the concept of beta for Apple stock, JPMorgan Chase & Co stock, and the S&P 500 market index:
Year | Apple Stock Price | JPMorgan Chase & Co Stock Price | S&P 500 Market Index Value
2017 | $149.04 | $93.85 | 2,425.17
2016 | $95.89 | $59.60 | 2,102.94
2015 | $124.50 | $68.25 | 2,076.79
2014 | $94.03 | $57.05 | 1,960.96
2013 | $60.93 | $56.49 | 1,606.28
2012 | $55.78 | $37.12 | 1,325.66
Part 1: Risk and Beta
A) Calculate the return each year for Apple, JPMorgan Chase & Co, and the S&P 500 market index using the following equation:
Value t - Value t-1
Return = -------------------------------------
Value t-1
In addition, use the Excel function to find the average for each corporation.
B) Calculate the standard deviation of returns for Apple, JPMorgan Chase & Co, and the S&P 500 market index using the Excel function.
C) Make a scatter plot of stock returns (y-axis) against market returns (x-axis) for both Apple and JPMorgan Chase & Co stock in one plot. Add a linear trendline to the scatter plot for each stock and include the equation on the chart. Identify the slope for each stock from the trendline equation. Label the y-axis, x-axis, legend, and chart title.
D) For each stock, use the Excel function to calculate the correlation between the stock returns and market returns. Furthermore, copy the standard deviations (from part B) and calculate the beta for each stock.
Standard Deviation stock
Beta = ---------------------------------------------- ( Correlation between stock and market )
Standard Deviation market
Part 2: Required Return
E) Assume a market risk premium of 5.40% and a risk free-free rate of 1.31%. Calculate the expected return on the market. Also calculate the required return for Apple and JPMorgan Chase & Co according to the CAPM.
F) If you formed a portfolio that consisted of 50% Apple stock and 50% JPMorgan Chase & Co stock, what would be its beta and its required return?
G) Suppose an investor wants to include Apple stock in their portfolio. Stocks A, B, and C are currently in the portfolio, and their betas are 0.68, 0.98, and 1.43, respectively. Calculate the new portfolio's beta and required return if it consists of 25% of Apple, 15% of Stock A, 40% of Stock B, and 20% of Stock C.