One measure of the risk or volatility of an individual stock is the standard deviation of the

total return (capital appreciation plus dividends) over several periods of time. Although

the standard deviation is easy to compute, it does not take into account the extent to which

the price of a given stock varies as a function of a standard market index, such as the S&P

500. As a result, many financial analysts prefer to use another measure of risk referred to

as beta.

Betas for individual stocks are determined by simple linear regression. The dependent

variable is the total return for the stock and the independent variable is the total return for

the stock market.* For this case problem we will use the S&P 500 index as the measure of

the total return for the stock market, and an estimated regression equation will be developed using monthly data. The beta for the stock is the slope of the estimated regression equation (b1). The data contained in the DATAfile named Beta provides the total return

(capital appreciation plus dividends) over 36 months for eight widely traded common

stocks and the S&P 500.

The value of beta for the stock market will always be 1; thus, stocks that tend to

rise and fall with the stock market will also have a beta close to 1. Betas greater than 1

indicate that the stock is more volatile than the market, and betas less than 1 indicate

that the stock isless volatile than the market. For instance, if a stock has a beta of 1.4,

it is 40% more volatile than the market, and if a stock has a beta of .4, it is 60% less

volatile than the market.

Managerial Report

You have been assigned to analyze the risk characteristics of these stocks. Prepare a report

that includes but is not limited to the following items.

a. Compute descriptive statistics for each stock and the S&P 500. Comment on your

results. Which stocks are the most volatile?

b. Compute the value of beta for each stock. Which of these stocks would you expect to perform

best in an up market? Which would you expect to hold their value best in a down market?

c. Comment on how much of the return for the individual stocks is explained by the

market.