Case Study

J. Suppose you have the following historical returns for the stock market and for another company, P.Q. Unlimited. Explain how to calculate beta, and use the historical stock returns to calculate the beta for PQU. Interpret your results.

|YEAR |MARKET |PQU |

|1 |26% |40% |

|2 |8% |-15% |

|3 |-11% |-15% |

|4 |15% |35% |

|5 |33% |10% |

|6 |14% |30% |

|7 |40% |42% |

|8 |10% |-10% |

|9 |-11% |-25% |

|10 |-13% |25% |

[pic]

The regression identifying the relationship between a stock and a general stock market, which is also considered the characteristics line. The Betas are calculated as the slope of the referenced characteristics line. The beta should be illustrated as the slope coefficient which is 0.83. The graph should also indicate the regression results average stocks move with the market and should be indicated as such. The Beta’s coefficient measures volatility as a stock relative to the stock market. The Beta of an average stock is 1.0. Typically, stocks beta represents a range of 0.5 to 1.5. The Beta can be negative, but usually they are positive. It is also important to illustrate that the r2 of the 0.36 is slightly higher than the value of 0.29. Portfolios can have r2 greater than 0.9.

k. The expected rates of return and the beta coefficients of the alternatives as supplied by barney smith’s computer program are as follows:

Security Return ([pic]) Risk (Beta)

Alta Inds 17.4% 1.29

Market 15.0...