U
NIVERSITY OF
N
ORTH
C
AROLINA
A
T
C
HAPEL
H
ILL
K
ENAN
-F
LAGLER
B
USINESS
S
CHOOL
B
USI
408:
C
ORPORATE
F
INANCE
S
OLUTIONS TO
A
SSIGNMENT
#3
P
ROF
.
A
RZU
O
ZOGUZ
F
ALL
2009
1.
Go to
http://finance.yahoo.com
and download monthly stock prices for the
following three stocks:
Proctor and Gamble (PG)
Apple Computer (AAPL)
Caterpillar (CAT)
a.
Enter each ticker symbol at the top of the page. Then, click on
“Historical Prices” on the left-hand side. Download monthly stock
price data for each stock, starting in December 2001 and ending in
December 2007. (Note that you can download data at many
frequencies; make sure you download the monthly data). Then do the
same for the S&P 500 index (ticker symbol ^GSPC) over the same
period.
b.
Use the price data to calculate monthly returns from January 2002
through December 2007 for each stock.
See attached spreadsheet.
c.
Compute the mean monthly return and standard deviation for the
monthly returns of each stock. Convert the monthly statistics to
annual statistics for easier interpretation (multiply the mean monthly
return by 12, and multiply the monthly standard deviation by the
square root of 12.)
See attached spreadsheet.
d.
Consider four portfolios with the following weights:
i.
Equally-weighted
ii.
30% in PG, 20% APPL, and 50% CAT
iii.
50% in PG, 30% APPL, and 20% CAT
iv.
20% in PG, 50% APPL and 30% CAT
Compute the expected return and volatility for each portfolio.
See attached spreadsheet.
e.
Plot the three stocks, the S&P index and the four portfolios in part (d)
on the return-volatility space, with volatility on the x-axis and the
average return on the y-axis. Compare the eight investment
opportunities. Can you recommend buying (or not buying) any of
these investments?

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f.
Using Excel regression analysis, run a regression of each stock’s
monthly returns on the ‘market’ (S&P 500) returns to estimate each
stock’s beta.
ߚ
்
ൌ 1.30
ߚ
ൌ 1.47
ߚ
ீ
ൌ 0.18
CAT Beta Estimation
AAPL Beta Estimation

PG Beta Estimation
g.
Using your best estimates for the current risk-free rate and the
historical market risk premium, calculate each stock’s required rate
of return on equity based on its beta.
Let
ݎ
ൌ 3.5%.
This is the current yield on the 10-year Treasury note.
Coming up with the market risk premium is trickier. Let
ܧሺܴ
ሻ െ ݎ
ൌ
5%.
This is a conservative estimate.
ܧሺܴ
்
ሻ ൌ ݎ
ߚ
்
ൣܧ൫ܴ
െ ݎ
൯൧ ൌ 3.5% 1.30 ൈ 5% ൌ 10%
ܧሺܴ
ሻ ൌ ݎ
ߚ
ൣܧ൫ܴ
െ ݎ
൯൧ ൌ 3.5% 1.47 ൈ 5% ൌ 10.85%

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