Question

Date	S&P500	HOG	MAR	LLY
20140131	-0.035583	-0.109041	-0.001033	0.059020
20140228	0.043117	0.075296	0.103448	0.112757
20140331	0.006932	0.008326	0.033008	-0.012582
20140430	0.006201	0.110044	0.034095	0.004077
20140530	0.021030	-0.032797	0.067150	0.021151
20140630	0.019058	-0.019512	0.040247	0.038590
20140731	-0.015080	-0.114961	0.009516	-0.017854
20140829	0.037655	0.028146	0.075568	0.048968
20140930	-0.015514	-0.080003	0.007205	0.020296
20141031	0.023201	0.128866	0.083691	0.022822
20141128	0.024534	0.060578	0.042772	0.034374
20141231	-0.004189	-0.050158	-0.009646	0.012772
20150130	-0.031041	-0.063875	-0.045239	0.043630
20150227	0.054893	0.035332	0.118121	-0.018472
20150331	-0.017396	-0.044518	-0.033454	0.035343
20150430	0.008521	-0.074580	-0.003362	-0.010736
20150529	0.010491	-0.042875	-0.022611	0.104772
20150630	-0.021012	0.053468	-0.046160	0.058175
20150731	0.019742	0.034605	-0.023928	0.012217
20150831	-0.062581	-0.038593	-0.023413	-0.019643
20150930	-0.026443	-0.014987	-0.034815	0.016272
20151030	0.082983	-0.099271	0.125806	-0.025332
20151130	0.000505	-0.010718	-0.073196	0.011892
20151231	-0.017530	-0.065822	-0.054576	0.027060
20160129	-0.050735	-0.118749	-0.085919	-0.061239
20160229	-0.004128	0.088000	0.116188	-0.083312
20160331	0.065991	0.189020	0.044461	0.000139
20160429	0.002699	-0.068186	-0.015313	0.048882
20160531	0.015329	-0.022789	-0.053503	0.000132
20160630	0.000906	-0.023496	0.006360	0.049580
20160729	0.035610	0.168212	0.078844	0.052571
20160831	-0.001219	-0.004157	-0.005160	-0.055857
20160930	-0.001234	0.004554	-0.051872	0.032283
20161031	-0.019426	0.084237	0.020347	-0.079990
20161130	0.034174	0.067871	0.151092	-0.084101
20161230	0.018201	-0.036131	0.049505	0.095799
20170131	0.017884	-0.022283	0.023222	0.047315
20170228	0.037198	-0.005172	0.031797	0.081786
20170331	-0.000389	0.073076	0.082653	0.015699
20170428	0.009091	-0.060992	0.002548	-0.024373
20170531	0.011576	-0.060465	0.143614	-0.024007
20170630	0.004814	0.019053	-0.068184	0.034309
20170731	0.019349	-0.099037	0.038680	0.004374
20170831	0.000546	-0.034107	-0.002687	-0.010283
20170929	0.019303	0.033291	0.064491	0.052282
20171031	0.022188	-0.018046	0.083621	-0.042086
20171130	0.028083	0.060414	0.065701	0.039297
20171229	0.009832	0.020817	0.068740	-0.002127

a) Using the returns on the S&P 500 Composite Index as the proxy for the overall stock-market return, estimate a beta for each stock listed above in Excel. Report the betas and comment on your level of confidence in each of the beta estimates given the significance level (p-values) of the t-statistics for the beta estimates in the regression models. Clearly demonstrate your understanding of beta calculations and statistical estimates

b)Which of the three stocks (HOG, MAR, LLY) has the most total return variability if held in isolation (i.e., not as part of a well-diversified portfolio)? Clearly convey what measure you used to identify the amount of risk of a stock held in isolation.

c)Which of the three stocks (HOG, MAR, LLY) has the most systematic risk? Clearly convey what measure you used to identify the amount of systematic risk.

Answer 1

a)

Beta of HOG is significant with confidence interval (1 - p-value) of 99.57% but R-square is low. This tells us that additional factor that are correlated with HOG but leaess correlated with S&P-500 will increase R-square and p- value will decrease.

Beta of MAR and the alpha (Intercept) is highly significant.

Beta of LLY is not significant with p-value of 0.378502.

Beta = Covariance (Market Returns, Stock Returns) / VAriance (Market returns).

b) VAriability or risk is measured by standard deviation.

Standard Deviation (SD) of HOG is highest, hence has the most variability.

c) Beta is the measure of Market Risk or systematic risk i.e. risk that cannot be diversified.

Beta of MAR stock is highest and the significant regression results tells us that MAR stock has the most systematic risk.