Case 2

Case 2 – Questions 7, 8, 9

Question 7

* Question 7 has you calculate the beta for each asset.

* Each item (TECO, Goldhill, S&P, T-bond) has five returns listed under it. Treat those as the returns for each asset for the last five years.

* The problem simply wants you to run a regression on the T-bond, TECO, and Goldhill, against the S&P, in order to calculate each asset’s beta.

* Remember, to calculate beta you regress the stock against the market (S&P).

STEPS

* Enter all of the returns in Excel as shown in Table 1, putting the S&P returns in the first column.

* Highlight the returns, including headings with asset names (all 4 columns)

* Click "Insert" then "Scatter Graph"

* On the scatter graph, right click on a point and select "Add Trendline". Make sure "Linear" is marked and then click box to "Add Equation to Chart".

* Do this for all three assets.

* So now you have the three assets regressed against the market, all on one graph! Cool, eh!!

* The equation’s x-coefficient is the slope of the regression line, which is the beta of the stock.

Question 8

Question 8 has you graph the SML.

Set up a table where you have 5 or so betas listed and their corresponding required returns in the next column. Make sure beta of 0 is one of them. For example (these are not the correct returns for the case):

Beta | Required Return |

0.0 | 10.0 |

0.6 | 14.2 |

1.0 | 16.0 |

1.5 | 19.5 |

2.0 | 21.0 |

* Highlight the columns, including headings

* Click "Insert" then "Scatter Graph"

* On the scatter graph, right click on a point and select "Add Trendline". Make sure "Linear" is marked

* You can also click box to "Add Equation to Chart" to add the SML equation.

Question 9

I want to see graphs for #9 also, showing how the SML changes under the conditions stated in the question. You should have old SML and new SML on one graph to show how it changed.

For example:

Make a...