From Yahoo!Finance obtain a report on any two companies. What are the betas list
ID: 2734210 • Letter: F
Question
From Yahoo!Finance obtain a report on any two companies. What are the betas listed for these companies? If you made an equal dollar investment in each stocks what would be the beta of your portfolio? If you made 70% of dollar investment in stock A, and 30% of dollar investment in stock B, what would be the beta of your portfolio? Please how your work. Apply the Capital Asset Pricing Model (CAPM) Security Market Line to estimate the required return on these two stocks. Assumptions and Data: Note that you will need the risk-free rate and the market risk premium. Assume a 5% market risk premium. To get the current yield on 10-year Treasury securities go to Finance!Yahoo’s (www.finance.yahoo.com) -click on Market Data - Bonds. You will use the current yield on 10-year Treasury securities as the risk-free rate to estimate the required rate of return on stocks. Please show your work. Compare the required return on these stocks calculated using CAPM in question #4 against their historical return over the last 52 weeks, found in the Yahoo!Finance - Key Statistics. Is there a difference between these returns? Is this a problem? Why is there a difference?
Explanation / Answer
The two companies that i have selected are The Coca Cola Company and Pepsico Inc.
(i) Coca Cola's beta is 0.82 and Pepsico's beta is 0.69
(ii) If equal dollar investments are made in each stock, the portfolio will have 50% weight for each stock i.e. the ratio will be 1:1 for Coca Cola and Pepsi.
Thus portfolio beta = 1/2*coca cola's beta + 1/2*pepsi's beta
= 1/2*0.82 + 1/2*0.69
= 0.410+0.345
= 0.755
(iii) Stock A = Coca Cola and Stock B = Pepsi.
Portfolio beta = 0.70*coca cola's beta + 0.30*pepsi's beta
= 0.70*0.82 + 0.30*0.69
= 0.574+0.207
= 0.781
(iv) Current yield on 10 year treasury securities from Yahoo Finance = 1.56
Using the CAPM formula: stock's return = risk free rate+(beta*market risk premium)
Return for Coca Cola = 1.56+(0.82*5)
= 5.66%
Return for PepsiCo = 1.56+(0.69*5)
= 5.01%
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