Question

Directions: Answer the questions below (taken from the Winston book) using the indicated data set. Submit this on Blackboard in this Word document by the due date indicated on Blackboard. Only submissions in this format will be accepted. This homework will rely heavily on a close reading of the assigned text.

Please show all work! This is an abbreviated version in order to complete the full version.

Date	S and P return	Dell return
1-Sep-88	0.042	0.282112845
1-Oct-88	0.027	0.1582397
1-Nov-88	-0.014	-0.084074373
1-Dec-88	0.018	-0.080317741
1-Jan-89	0.072	-0.049904031
1-Feb-89	-0.025	-0.171717172
1-Mar-89	0.024	-0.095121951
1-Apr-89	0.052	0.105121294
1-May-89	0.04	0.079268293

1. Estimate the beta of Dell.

2. Interpret the meaning of Dell’s beta.

3. f you believe a recession is coming, would you rather invest in a high- beta or low-beta stock?

Answer 1

Answer 1:- Beta of Dell is calculated in Excel worksheet and it has been provided below along with formula sheet.

Beta of stock = covariance of market and stock returns / variance of market returns  

So, Beta of Dell stock is 2.547501417 or 2.55 (approx)

Answer 2:- Beta is a measure of systematic risk and it measure how much the stock is volatile in response to market volatility. If the beta is more than 1, it means stock is more volatile than market or High- beta stock and if it is less than 1 then it means that stock is less volatile than market or Low-Beta stock.

As, the Beta of Dell stock is 2.55, it means than stock moves more rapidly as compared to market or it can be said that the stock is more responsive to market volatility,

Answer 3:- If a recession is approaching then i would rather invest in Low-beta stock and reason for doing so is simply the fact that if recession comes then it will affect the stock market and will hit it hard by pushing downward most probably and investing in low-beta stocks means such stock will respond less to such volatility and hence i can save my invested amount to a greater extent and low-beta stocks sometimes outperform the market during the time of recession.