Rob McGowan collects data from General Motors, General Electric, Oracle, and Microsoft. His professor seeks to...

Rob McGowan collects data from General Motors, General Electric, Oracle, and Microsoft. His professor seeks to form a portfolio using these stocks. ?

3. Compute the “beta” for each stock (Use DJIA as the market return).

a) What does beta measure?

1997-06-01	4.93
1997-07-01	5.05
1997-08-01	5.14
1997-09-01	4.95
1997-10-01	4.97
1997-11-01	5.14
1997-12-01	5.16
1998-01-01	5.04
1998-02-01	5.09
1998-03-01	5.03
1998-04-01	4.95
1998-05-01	5.00
1998-06-01	4.98
1998-07-01	4.96
1998-08-01	4.90
1998-09-01	4.61
1998-10-01	3.96
1998-11-01	4.41
1998-12-01	4.39
1999-01-01	4.34
1999-02-01	4.44
1999-03-01	4.44
1999-04-01	4.29
1999-05-01	4.50
1999-06-01	4.57
1999-07-01	4.55
1999-08-01	4.72
1999-09-01	4.68
1999-10-01	4.86
1999-11-01	5.07
1999-12-01	5.20
2000-01-01	5.32
2000-02-01	5.55
2000-03-01	5.69
2000-04-01	5.66
2000-05-01	5.79
2000-06-01	5.69

Month	Sale Date	GM	GE	Oracle	Microsoft	DJIA
1	1-Jun-97	-0.86995	10.49754	21.13459	2.77686	4.485357
2	1-Jul-97	1.710171	9.648689	-0.91827	0.450306	5.939172
3	1-Aug-97	14.31172	5.415162	13.06766	12.58405	6.10839
4	1-Sep-97	-2.62739	-9.50521	4.180328	-6.00114	-6.97605
5	1-Oct-97	10.83401	9.592326	-5.58615	1.270802	5.156892
6	1-Nov-97	-1.20823	-0.70022	-0.33333	0.179265	-4.25563
7	1-Dec-97	-8.00688	10.23692	-11.1204	7.217417	4.413641
8	1-Jan-98	6.896552	-0.81103	-30.0094	-10.1252	-1.30861
9	1-Feb-98	-0.41824	8.503679	10.34946	19.83906	2.523061
10	1-Mar-98	17.14	-2.52101	-2.07065	7.592975	5.459818
11	1-Apr-98	2.11712	12.89185	30.0995	8.473356	3.717582
12	1-May-98	1.760057	-0.41652	-18.5468	-0.84089	3.143211
13	1-Jun-98	3.741617	-2.50618	-10.7981	-6.56104	-2.45652
14	1-Jul-98	-0.88465	10.02896	5.526316	30.61858	1.415543
15	1-Aug-98	3.833245	-0.65811	10.72319	-0.85939	-2.89468
16	1-Sep-98	-17.0466	-7.60979	-22.8604	-6.63962	-10.9177
17	1-Oct-98	-4.77851	-8.6357	31.38686	2.78546	-2.48996
18	1-Nov-98	20.29924	17.07705	10.88889	1.691332	14.06637
19	1-Dec-98	10.07982	4.292582	23.34669	22.37762	4.909059
20	1-Jan-99	2.512648	11.95258	16.8156	7.088803	0.524331
21	1-Feb-99	30.48698	1.411765	37.06537	24.70436	1.789155
22	1-Mar-99	-10.9758	-1.23312	-7.10299	-12.2586	-0.22385
23	1-Apr-99	5.181951	10.58264	-29.4921	22.1695	5.444954
24	1-May-99	9.7295	-4.24731	0.929512	-13.8203	12.02318
25	1-Jun-99	-8.76355	-2.89773	-2.14889	-1.72759	-3.79884
26	1-Jul-99	-1.99462	8.718549	48.07843	16.16561	4.437037
27	1-Aug-99	-8.50214	-2.12594	0.95339	-6.99638	-3.79942
28	1-Sep-99	7.967033	5.396384	-1.15425	8.925834	2.742073
29	1-Oct-99	-4.35564	3.246239	20.11677	-2.59796	-6.07869
30	1-Nov-99	10.44177	11.29857	13.07998	2.667259	3.655407
31	1-Dec-99	5.367273	4.012059	38.10082	0.876813	3.285621
32	1-Jan-00	5.300939	11.46042	67.11941	25.0778	3.265296
33	1-Feb-00	14.2302	-8.34167	-8.56756	-11.685	-2.78644
34	1-Mar-00	-12.9032	-3.39731	32.40741	-11.7836	-8.17975
35	1-Apr-00	16.44444	20.82667	7.524476	0.077084	10.69253
36	1-May-00	9.291357	1.323001	3.655047	-19.1901	-3.65481
37	1-Jun-00	-24.6844	-1.39307	-2.2713	-12.0915	-1.47598

Solutions

Expert Solution

Beta can be caluclated using the formula using excel:

Beta measures the stock's sensitivity with respect to market. Beta of 1 indicates that if the market increases by 1 unit, the stock also increases by 1 unit.

Beta of greater than 1 indicates that the stock is aggresive, that is, it swings more than the market over time. If market increases(decreases) by 1 unit, the stock increases(decreases) by more than 1 unit.

Similarly, if the beta is less than 1, it is called a defensive stock, that is the stock moves less than the market.

If Rob McGowan seeks to create a portfolio using these stocks, he must select the stock based on his risk appetite.
In the screenshot attached above, there is also a correlation matrix, which measures the pair-wise co-movement of stocks. The get the maximum benefit of diversification, he must select the stocks with low (or negative correlation) for the portfolio.

jeff jeffy answered 1 year ago

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