The tendency of a stock’s price to move up and down with the 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.
In this part of the project, you get financial information using Yahoo!Finance (found at http://finance.yahoo.com/ )
To find a company’s beta, enter the desired stock symbol and request a basic quote. Once you have the basic quote, select the “Key Statistics“. Scroll down this page to find the stock’s beta.
From Yahoo!Finance obtain a report your firm and its closest competitor..
- What are the betas listed for these companies?
- If you made an equal dollar investment in each stocks what would be the beta of your portfolio?
- 3. Apply the Capital Asset Pricing Model (CAPM) Security Market Line to estimate the required return on these two stocks.
Assumptions and Data: Note that you will need an estimate of the risk-free rate, rRF, the market risk premium. Assume a 5% market risk premium and get the current yield on 10-year Treasury securities from Finance!Yahoo’s frontpage click on Investing – Bonds.
Compare the required return on these stocks calculated using CAPM in question #3 against their historical return over the last 52 weeks, found in the Yahoo!Finance Profile. Is there a difference between these returns? Is this a problem? Why is there a difference?
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