Compute the value of beta - simple linear regression , Basic Statistics

Simple Linear Regression

One measure of the risk or volatility of an individual stock is the standard deviation of the total return (capital appreciation plus dividends) over several periods of time. Although the standard deviation is easy to compute, it does not take into account the extent to which the price of a given stock varies as a function of a standard market index, such as the S&P 500.As a result, many financial analysts prefer to use another measure of risk referred to as beta. Betas for individual stocks are determined by simple linear regression. The dependent variable is the total return for the stock and the independent variable is the total return for the stock market.* For this case problem we will use the S&P 500 index as the measure of the total return for the stock market, and an estimated regression equation will be developed using monthly data. The beta for the stock is the slope of the estimated regression equation (b1). The data contained in the file named Beta provides the total return (capital appreciation plus dividends) over 36 months for eight widely traded common stocks and the S&P 500.The value of beta for the stock market will always be 1; thus, stocks that tend to rise and fall with the stock market will also have a beta close to 1. Betas greater than 1 indicate that the stock is more volatile than the market, and betas less than 1 indicate that the stock is less volatile than the market. For instance, if a stock has a beta of 1.4, it is 40% more volatile than the market, and if a stock has a beta of .4, it is 60% less volatile than the market.

You have been assigned to analyze the risk characteristics of these stocks. Prepare a report that includes but is not limited to the following items.

a. Compute descriptive statistics for each stock and the S&P 500. Comment on your results. Which stocks are the most volatile?

b. Compute the value of beta for each stock. Which of these stocks would you expect to perform best in an up market? Which would you expect to hold their value best in adown market?

c. Comment on how much of the return for the individual stocks is explained by the market.

Posted Date: 3/1/2013 4:43:41 AM | Location : United States







Related Discussions:- Compute the value of beta - simple linear regression , Assignment Help, Ask Question on Compute the value of beta - simple linear regression , Get Answer, Expert's Help, Compute the value of beta - simple linear regression Discussions

Write discussion on Compute the value of beta - simple linear regression
Your posts are moderated
Related Questions
Use of Assets A potential upcoming financial advantage acquired or managed by a particular business due to past purchases or activities. These financial options can be concrete or

What is prime cost? Primary price is the combination of a manufactured item's expenditures of immediate materials and immediate labor. In other words, prime price represent

. Good day, Using 4-inch pole caps and a Mettler M5 balance, I got all the values required in order to calculate the magnetic susceptibility of several inorganic compounds such as

Report on the residual plots – are the assumptions of the regression met

Cash equivalent Short-term: highly liquid investments that are together [1) readily convertible to known amounts of cash & [2) so close to their maturity that they there insignifi

Definition and examples of asset and liabilities

An internal report issued by the marketing manager of a oil-change franchise claims that the mean number of miles between oil changes is for franchise customers is at least 3600 mi

what are the characteristics

what are the condition to use probable error

Question: (a) Suppose that 100 tires made by Bridgestone last on average 21,819 miles with a standard deviation of 1,295 miles. Test the null hypothesis µ = 22, 000 miles again