Question

You hear on the news that the? S&P 500 was down 1.1% today relative to the? risk-free rate? (the market's excess return was -1.1 % ). You are thinking about your portfolio and your investments in Zynga and Proctor and Gamble.

a. If? Zynga's beta is 1.3?, what is your best guess as to? Zynga's excess return? today?

b. If Proctor and? Gamble's beta is 0.5?, what is your best guess as to? P&G's excess return? today?

Answer 1

The formula for rate of return on a stock using Capital Asset Pricing Model (CAPM) is as follows :

Return on stock = Risk-free rate + Excess market return

r_stock = r_{risk-free rate} + [Beta * (r_market - r_{risk-free rate})]

In this case, (r_market - r_{risk-free rate}) = -1.1%

a.

Beta of Zynga = 1.3

Therefore, Zynga's stock was down by 1.43%

= Excess market return * Beta of stock

= - 1.1% * 1.3

= - 1.43%

b.

Similarly,

Proctor and Gamble's Beta = 0.5

Therefore, Zynga's stock was down by 0.55%

= Excess market return * Beta of stock

= - 1.1% * 0.5

= - 0.55%