Question

1)    Use the below table of share price for TSLA and index level for the S&P 500 for the CAPM questions that follow related to TSLA. You can copy this table and paste it completely into Excel to avoid typing it out. Calculate the beta of TSLA.  

Date	TSLA	S&P 500
10/1/2018	67.464	2711.74
11/1/2018	70.096	2760.17
12/1/2018	66.56	2506.85
1/1/2019	61.404	2704.1
2/1/2019	63.976	2784.49
3/1/2019	55.972	2834.4
4/1/2019	47.738	2945.83
5/1/2019	37.032	2752.06
6/1/2019	44.692	2941.76
7/1/2019	48.322	2980.38
8/1/2019	45.122	2926.46
9/1/2019	48.174	2976.74
10/1/2019	62.984	3037.56
11/1/2019	65.988	3140.98
12/1/2019	83.666	3230.78
1/1/2020	130.114	3225.52
2/1/2020	133.598	2954.22
3/1/2020	104.8	2584.59
4/1/2020	156.376	2912.43
5/1/2020	167	3044.31
6/1/2020	215.962	3100.29
7/1/2020	286.152	3271.12
8/1/2020	498.32	3500.31
9/1/2020	424.23	3236.92

2) Using the beta you just calculated above, a risk free rate of 0.70%, and a market return of 5.5%, what is the required rate of return for TSLA?

3) If the current share price of TSLA is $380, it pays no dividend, and the consensus estimated share price in one year is $400, what is the estimated return for this stock? Should you invest in it based on comparing the estimated return you just calculated to its required return?  

Answer 1

Answer to 1

Calculation of Beta using CoVariance Formula :

Beta is a ratio of "Covariance of Security with the Market " and "Variance of Market"

Beta of TSLA = Covariance Between Security TSLA and Market / Variance of the Market

= Sum of (Deviation of TESLA *Deviation of Market Returns) / Variance of the Market

= 19.23 % / 0.38%

= 0.80125 % / 0.38%

= 2.1086 (Approx)

Variance of Market is 0.38 % using Excel VAR Function .

Covariance Between Security TSLA and Market = Sum of (Deviation of TESLA *Deviation of Market Returns) / Number of Data

Covariance = 19.23 % / 24

= 0.80125 %

Answer to 2

Required Rate of Return of TESLA ? , Using Capital Asset Pricing Model

CAPM = Risk Free Return + Beta of TESLA (Return of Market - Risk Free Return)

= 0.70% + 2.11 (5.5% -0.70%)

= 0.70% + 10.128 %

CAPM = 10.828 %

So, The Required Rate of Return of Tesla = 10.83 % (approx)

Answer to 3

If the current share price of TSLA is $380

No dividend Paid

Estimated share price in one year is $400

What is the Estimeted Return on this stock ?

Holding Period Return (1 year ) of TSLA = Dividend Yield + Capital Gain Yield

= 0 + 5.263

Holding Period Return (1 year ) of TSLA = 5.263 %

So, The Required Rate of Return = 10.83 % and Return earned (estimated) = 5.26%

So, We should not Invest in this TSLA Stock as the Return an Investor is getting is only 5.26 % Which is half of its Required Rate of Return and almost Equal to Market Return of 5.5 % .

Since the TSLA has Beta of 2.11 which Shows if Market Fluctuate by 1 point TSLA stock will Fluctuate by 2.11 Points which shows it has twice the reaction as compared to market and so the RISK of TSLA is DOUBLE .

Therefore, we should not Invest in this Stock .

NOTE : Dividend yield is 0 , because no dividend paid during the year.

Capital Gain Yield =  (Price at the end - Price at the Begining)/ Price at the Begining

= $ 400 - $ 380 / $ 380

= $20 / $380

= $ 0.0526

so, capital gain yield is 5.2632 %