Question

1. In financial management, the appropriate measure of risk for diversified investors is how the return on an individual investment moves relative to the returns for the market portfolio (the market portfolio is often measured by some broad-based stock index, such as the Standard & Poor 500). This risk is measured by a security’s beta. Beta represents the nondiversifiable risk remaining for a stock after a portion of its total risk has been diversified away by forming portfolios. If beta is greater than 1, the stock is considered to be risky since it is more volatile than the market. If beta is less than 1 then the stock fluctuates less than does the market, and is hence less risky.

In order to calculate (estimate) a stocks beta, we begin with the returns for the stock in question as the dependent variable, Y and the return for the market as the independent varibale, X. Then we fit a line to the data, using least squares. Beta is the estimated slope of the line.

The bete data worksheet returns for a particular stock compared to the return of a market index

1a Performa regression analysis to estimate the value of beta. Based on the information above and your estimated value of beta, is the stock more or less risky than the market?

1b. Is the slope (beta) you found in a part a significantly different from 0? is stick significantly related to Market Index) Give the p-value you used to make your conclusion about the significace.

Market Index	Stock
15.5%	30.6%
6.8%	7.4%
7.6%	7.2%
7.9%	7.8%
1.8%	-2.4%
10.0%	6.1%
11.6%	6.5%
5.2%	5.3%
23.1%	24.8%
8.0%	8.2%
6.5%	5.1%
8.7%	9.6%
8.5%	7.2%
0.2%	8.1%
11.2%	10.9%
9.8%	5.0%
11.4%	6.5%
4.3%	5.4%
12.0%	5.8%
12.7%	6.2%
11.7%	21.0%
7.5%	5.2%
14.1%	15.4%
12.6%	14.2%
14.7%	16.2%
11.6%	9.9%
11.7%	10.2%
9.5%	7.3%
10.0%	15.5%
0.0%	-6.4%
10.8%	10.9%
12.8%	14.0%
11.2%	14.2%
9.7%	12.6%
14.4%	13.5%

Answer 1