Practical Portfolio Management Project

In this small project you will try to link theory to practice. You have heard a lot about risk, return, weights, standard deviations, beta, etc.. Now it is our turn to collect data, analyze it and put it to work. Here is what I’d like you to do for this project:

A firm’s beta can be estimated from the slope of the characteristic line. The first step is to plot the return on the firm’s stock (y-axis) vs. the return on a broad market index (x-axis). Next, a regression line is estimated to find the slope.

• Go to finance.yahoo.com, enter the symbol for a company of your choice, and click on ” Get Quotes”. On the left-side menu, click on “Historical Prices, then enter starting and ending dates that correspond to the most recent two years. Select the “Daily” option. Save the data to a spreadsheet

• Repeat the process to get comparable data for the S&P 500 index (symbol ^GSPC). Download the data and copy it into the same spreadsheet as your firm’s data with dates aligned.

• Sort the data from earliest to latest. Calculate the return on the stock and the return on the index for each day using the adjusted closing prices. (You can use four-week T-bill rates to calculate excess returns from the Federal Reserve website at www.federalreserve.gov/releases/h15/data.htm.)

• Prepare an xy scatter plot with no line inserted. Be sure that the firm’s excess returns represent the y-variable and the market’s excess returns represent the x-variable.

• Select one of the data points by pointing to it and clicking the left mouse button. While the point is selected, right-click to pull up a shortcut menu. Select Add Trend-line, choose the linear type, then click on the Options tab and select Display Equation on Chart. When you click on OK, the trendline and the equation appear. The trend-line represents the regression equatin. What is your beta?