Discussion Questions
1. Begin by taking a look at the historical performance of the overall stock market. If you want to see, for example, the performance of the S&P 500, select INDICES and enter S&PCOMP. Click on PERFORMANCE and you will immediately see a quick summary of the market’s performance in recent months and years. How has the market performed over the past year? The past 3 years? The past 5 years? The past 10 years?
2. Now let’s take a closer look at the stocks of four companies: Colgate Palmolive (Ticker CL), Gillette (G), Merrill Lynch (MER), and Microsoft (MSFT). Before looking at the data, which of these companies would you expect to have a relatively high beta (greater than 1.0), and which of these companies would you expect to have a relatively low beta (less than 1.0)?
3. Select one of the four stocks listed in question 2 by selecting COMPANIES, entering the company’s ticker symbol, and clicking on GO. On the overview page, you should see a chart that summarizes how the stock has done relative to the S&P 500 over the past 6 months. Has the stock outperformed or underperformed the overall market during this time period?
4. Return to the overview page for the stock you selected. If you scroll down the page
you should see an estimate of the company’s beta. What is the company’s beta? What
was the source of the estimated beta?
5. Click on the tab labeled PRICES. What is the company’s current dividend yield? What has been its total return to investors over the past 6 months? Over the past year? Over the past 3 years? (Remember that total return includes the dividend yield plus any capital gains or losses.)
6. What is the estimated beta on this page? What is the source of the estimated beta?
Why might different sources produce different estimates of beta? [Note if you want to see even more beta estimates, click OVERVIEWS (on second line of tabs) and then
select the SEC DATABASE MARKET DATA. Scroll through the STOCK OVERVIEW
SECTION and you will see a range of different beta estimates.]
7. Select a beta estimate that you believe is best. (If you are not sure, you may want to
consider an average of the given estimates.) Assume that the risk-free rate is 5 per-
cent and the market risk premium is 6 percent. What is the required return on the
company’s stock?
8. Repeat the same exercise for each of the 3 remaining companies. Do the reported
betas confirm your earlier intuition? In general, do you find that the higher-beta
stocks tend to do better in up markets and worse in down markets? Explain.
