Question

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

Answer 1

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.