Table of contents • Outline the contents of the report in numbered sections. • Give titles of

Some modifications of the beta coefficient are the adjusted beta and the fundamental beta. The former tries to transform the historical beta closer to an average beta of 1.0. The latter seeks to incorporate information concerning the company to achieve a better estimate for beta. Moreover, beta values out of less-developed financial markets are not good estimates and therefore partly biased. Problems in estimating beta for divisions of a corporations could arise if the divisions are too small and therefore can be compared with less-developed financial markets. Hence, beta coefficients could be biased (Brigham & Daves, 2007).

* Stock Beta: Exhibit 5 shows a detailed measurement of the company’s stock returns in relation to the rest of the market through 5-year historical price and index data. The analysis includes monthly returns of both the NYSE and the S&P 500 index in order to capture a comprehensive view of the market return. In each comparison, the monthly returns of the Target stock and market are plotted on Y-axis and X-axis respectively to get the regression line’s slope or beta. The analysis arrives at an average beta of 0.988 which indicates a similar movement of Target stock’s returns in comparison to the whole market over time.

4. If the slope of the line measuring a stock's historic returns against the market's historic

This means that JC Penney turns over their inventory 2.5 times during year. TJX turns over their inventory 5 times during the year, in fact TJX is the only competitor whose turn over inventory average is above the industry average. As stated in Fundamentals of Corporate Finance by Stephen A. Ross, the Beta indicates "the amount of systematic risk present in a particular risky asset relative to that in an average risky asset" (427). The Beta for JC Penney and TJX is above industry average- that means that these companies would have a greater expected return.

2. Beta, which is a measure of systemic risk, is a good indicator of how volatile a stock is relative to the market and it is a significant measurement to focus on when trading because the higher the beta, the greater the risk you gain in your portfolio. It is also important to make sure you allocate a lot of your money into commodities; their betas are usually low which is a good thing, especially if you are a risk-adverse investor. Conversely, higher beta stocks may be more volatile but they have the potential to generate higher returns then stocks with lower betas.

(1) What is a beta coefficient, and how are betas used in risk analysis? (2) Do the expected returns appear to be related to each alternative’s market risk? (3) Is it possible to choose among the alternatives on the basis of the information developed thus far? Use the data given at the beginning of the problem to construct a graph that shows how the T-bill’s, High Tech’s, and Collections’ beta coefficients are calculated. Discuss what beta measures and explain how it is used in risk analysis.

The regression that we performed in excel for both stocks yielded a beta of .73576 for Reynolds, and a beta of 1.4198 for Hasbro. In question 2 we learned that although Reynolds stock was riskier independently, adding it to the portfolio made it more diversified compared to adding Hasbro, due to the fact that it was less correlated to the market portfolio. Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Therefore, since the beta of Reynolds is lower than Hasbro, our beta calculations align with the fact that Reynolds stock makes the overall portfolio less risky. This finding is also intuitive when considering the nature of the companies; Reynolds is a Tobacco company meaning that is should be less sensitive to changes in market conditions than a toy company like Hasbro.

The beta of a stock measures the risk of the stock. However, is not not just any risk, it is the risk that you should expect to be rewarded for

We use the equation ri=(Pt-Pt-1+Dt)/Pt-1 to calculate the monthly return of stock of Charles Schwab Corp, Quick & Reilly Group and Waterhouse Investor Srvcs. Then we have two methods to calculate the Beta of Equity for each company.

A common practice to determine the firm’s beta is to draw from historical data from published sources or compare numbers to competitors. In this case, Heinz can compare to Kraft, Campbell Soup and Del Monte and use professional judgement in determining the stock’s sensitivity to the market. A stock’s beta can be determined using a formula as well.

      Beta: is seen as an ‘index of responsiveness’ of changes in a security’s returns relative to changes in returns on the market, in this case is sport utility industry)

Beta measurement for the Nike Company, is a statistical measure that compares the volatility of a stock against the volatility of the broader market, which is typically measured by a reference market index. Since the market is the benchmark, the market's beta is always 1. When a stock has a beta greater than 1, it means the stock is expected to increase by more than the market in up markets and decrease more than the market in down markets. Conversely, a stock with a beta lower than 1 is expected to rise less than the market when the market is moving up , but fall less than the market when the market is moving down. Despite being rare, a stock may have a negative beta, which means the stock moves opposite the general market trend (Macro Axis, 2017).

Of these 6 comparable companies, 3 of them are kitchen and bath companies and the rest 3 deals with engines and generators. Hence an average of the asset beta has been taken for these two sub groups which represent different business segments. Finally to arrive at the asset beta which would reflect the riskiness/volatility of Kohler, weighted average of these two betas has been taken as provided in the calculations below:

For estimation of betas, the above equation was run for the period from Jan, 2003 to Dec, 2006. Based on the estimated betas we have divided the sample of 63 stocks into 10 portfolios each comprising of 6 stocks except portfolio no.1, 5 and 10 having seven stocks each. The first portfolio 1 has the 7 lowest beta stocks and the last portfolio 10 has the 7 highest beta stocks. The rationale for forming portfolios is to reduce measurement error in the betas.

Using CAPM: Risk Free Rate = 6%; Market Risk Premium = 5%; Beta = 1.2