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FIN 3150 Summer 2018 Assignment 4 – Capital asset pricing model and required returns Due: June 6, 2018 1. Select two stocks that have prices available for the last ten years. (You may find it more interesting if you select one stock that is relatively risky and another that is less risky.) Each stock must have traded continuously during the ten-year period. Select a proxy for “the market” (I recommend using the Standard & Poor Index, ticker symbol: ^GSPC, as the market proxy but you can choose another proxy that reflects a well-diversified portfolio that approximates the entire market). Obtain weekly and monthly prices for the stocks and weekly and monthly values for the market proxy for the last ten years. 2. Calculate the weekly and monthly returns on the two stocks and on the market proxy. 3. Look up the beta for the two stocks on two financial reporting sites (such as, Bloomberg, yahoo finance, google finance, market watch, Reuters, etc.) 4. Use a single variable regression to calculate the each stock’s beta based on the a. weekly returns on the stock and the market for the last ten years. b. monthly returns on the stock and the market for the last ten years. 5. Using only the last five years’ returns, calculate each stock’s beta based on a. weekly returns. b. monthly returns. 6. Comment on differences you observe in the betas in 3, 4a, 4b, 5a and 5b. 7. Obtain an estimate of the risk free interest rate (you may use, e.g., the yield on Treasury bills or Treasury notes for a maturity of your choice). Assume the expected annual return on the market is 12%, use one beta for each stock from questions 4 or 5 to determine the required (expected) return on each stock based on the capital asset pricing model.



Prof. Angela


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