Beta Project

FIN-625

05/08/2013

Project:

Introduction:

In the first part we extracted the last 250 weekly data points of Bank of America BAC, S&P500 and T-Bill from Yahoo Finance in order to calculate the beta for Bank of America BAC. Then we calculated the cost of equity using the CAPM model.

In the second part we computed the beta of BAC using fewer data points.

Determination of Beta:

The first step was to find the weekly returns of BAC, S&P500 and T-BILL using the following formula: rr=(P1-P0)/P0

Then we used the excel’s slope function to calculate the beta of BAC by putting the weekly returns of BAC as the dependant variable Y and the weekly returns of the S&P500 as the independent variable X

The beta that we calculated, 2.39, was different from the one found in Bloomberg, 1.843, or Yahoo Finance, 1.78; even though Bloomberg uses weekly data too and the same method as excel does to figure out the beta. We use only 251 weeks of data in order to find the beta whereas Bloomberg is using a lot more data, for this reason the two betas are different.

Determination of the cost of equity:

In order to determine the cost of equity we used the CAPM model:

Before we computed the cost of equity we calculated the EAR for the T-bill and S&P500 using this formula:

EAR=((1+i)^52)-1

Here are the results found:

beta | S&P500 annual return | T-BILL annual return | Cost of equity |

2.395773311 | 0.083396467 | 0.001650749 | 0.197494958 |

Determination of the cost of equity with less data:

Before computing the beta for each category here is the rank that we chose:

1-each first 5 points of each deciles

2-first and last deciles

3-fifth and sixth deciles

4-50 random data points

| First 50 random points | Each decile's first five points | Fifth and sixth decile | First and last decile |

Beta | 2.603151745 | | 1.866740801 | | 4.13538302 | | 3.188882901 |

After computing the beta we found:

1-50 random data points

2-each first 5 points of...