The tendency of a stock’s price to move up and down with the stock market is reflected in its beta coefficient. Therefore, beta is a measure of an investment’s market risk, and is a key element of the CAPM.
For this Discussion, data are needed for 2 companies’ stocks; select any two companies that are of interest to you.
Data for this Discussion can be obtained from Yahoo Finance (https://finance.yahoo.com/ )
To find a Beta of a company’s stock, enter the stock symbol for the company and select “Ask for Quote”.
After getting the basic quote, select the “Key Statistics” from the menu on the left hand side of the screen. Scroll down this page to find the stock’s beta.
1. What are the betas for these companies’ stocks?
2. If an equal dollar investment was made in each of the two stocks, what would be the beta of the portfolio?
3. Apply the Capital Asset Pricing Model (CAPM) Security Market Line formula to estimate the required return on each of the two stocks. For this question, assume a 5% market risk premium. To estimate the risk-free rate, obtain the current yield on a 10-year Treasury bond (Go to Yahoo Finance (www.finance.yahoo.com), and click on Market Data – Bonds. Then, find the current yield on the 10-year Treasury bond.
4. Compare the estimated required returns on these stocks (calculated using the CAPM in question No. 3) to the historical return over the last 52 weeks (found in the Yahoo Quote information), found in the Yahoo “Key Statistics”. Is there a difference between the two returns? If so, why is there a difference?