The tendency of a stock's price to move up and down with the market is reflected in its beta coefficient. Therefore, beta is a measure of an investment's market risk, and is a key element of the CAPM. In this exercise, you get financial information using Yahoo! Finance. To find a company's beta, enter the desired stock symbol and request a basic quote. Once you have the basic quote, select the "Key Statistics" option in the "More Info" section of the basic quote screen. Scroll down this page to find the stock's beta.
Identify the beta listed for a food service (restaurant) company called P.F. Chang’s Bistro, stock symbol PFCB. According to Yahoo! Finance, what is PFCB's beta?
Again from Yahoo! Finance obtain a report on General Electric (GE) and Ford Motor Company (F). What are the betas listed for these companies?
If you made an equal dollar investment in each of these stocks what would be your portfolio’s beta?
Apply the Capital Asset Pricing Model (CAPM) Security Market Line to estimate the required return on General Electric stock and compare the required return against the return over the last 52 weeks, found in the Yahoo! Finance Profile. Is there a difference between these returns? Is this a problem? Why is there a difference? Assumptions and Data: Note that you will need an estimate of the risk-free rate, rRF, the market risk premium. Assume a 5% market risk premium and get the current yield on 10-year Treasury securities from Yahoo! Finance’s front page in the Market Summary (left side of page).
After reading the Mini Case Study on p. 238, (this page number corresponds with the hardcopy of the textbook, Financial management Theory and Practice, Brighamam and Ehrhardt) please answer questions a-m.