How to find market risk premium on yahoo finance

Violetta:

From Yahoo!Finance obtain a report on any two companies.

I choose two companies: Home Depot and Sherwin-Williams.

1. What are the betas listed for these companies? Answer: Replicating the calculation for beta by Yahoo Finance requires 37 monthly prices for the selected ticker and the S&P 500 from a given start date to an end date. Returns are calculated from months 2 to 37. The calculations use the close prices. Yahoo Finance uses Excel’s SLOPE() function (Khan, 2015, p.1). Yahoo Finance shows beta for the following companies as, Home Depot = 0.99 and Sherwin-Williams = 1.15

2. If you made an equal dollar investment in each stocks what would be the beta of your portfolio? Answer: The beta of a portfolio is the weighted average of the betas of its components and is calculated by multiplying the percentage of each stock in the portfolio by its beta and adding up the betas. The portfolio betas for Home Depot and Sherwin-Williams has an equal percentage investments and is calculated as follows: = 0.50 * 0.99 + 0.50 * 1.15 = 1.07

3. If you made 70% of dollar investment in stock A, and 30% of dollar investment in stock B, what would be the beta of your portfolio? Answer: Employing the companies selected – Home Depot: Stock A and Sherwin-Williams Stock B, the calculation for the new beta are as follows: = 0.70 * 0.99 + 0.30 * 1.15 = 1.038

4. Apply the Capital Asset Pricing Model (CAPM) Security Market Line to estimate the required return on these two stocks. Assumptions and Data: Note that you will need the risk-free rate and the market risk premium. Assume a 5% market risk premium. To get the current yield on 10-year Treasury securities go to Finance!Yahoo’s (www.finance.yahoo.com) -click on Market Data - Bonds. You will use the current yield on 10-year Treasury securities as the risk-free rate to estimate the required rate of return on stocks.

Answer: HOME DEPOT Risk Free Rate=1.74 Beta=0.99 Market Risk=5.0 The required return rate for Home Depot = 1.74 + (0.99 * (5.0 - 1.74)) = 1.74+3.227=4.97% SHERWIN-WILLIAMS Risk Free Rate=1.74 Beta=1.15 Market Risk=5.0 The required return rate for Sherwin-Williams = 1.74 + (1.15 * (5.0 - 1.74) = 1.74+3.749= 5.49%

5. Compare the required return on these stocks calculated using CAPM in question #4 against their historical return over the last 52 weeks, found in the Yahoo!Finance - Key Statistics. Is there a difference between these returns? Is this a problem? Why is there a difference? Answer: Home Depot and Sherwin-Williams historical returns over the last 52 weeks listed by Yahoo Finance as 18.06% and 4.68% respectively. Comparing the rates for Home Depot: 18.06% historical to the required rate of return of 4.97% shows a wide spread between the rates. The opposite is true for Sherwin-Williams with historical returns over the last 52 weeks listed as 4.68% to the required rate of return of 5.49%. For Home Depot, it would appear that investors would not earn the expected return on their investments; however, investors of Sherwin-Williams would see an increase in their return on investment. Expected return is forward looking in the sense that it represents the return investors expect to receive in the future. The challenge is that expected rates cannot be precisely predicted to know what the future holds and thus what the expected return should offer.

6. References

1. Yahoo! Finance. (2016). The Home Depot, Inc.. [online] Available at: http://finance.yahoo.com/q?s=HD&fr=uh3_finance_vert_gs&type=2button&uhb=uhb2 [Accessed 14 Jun 2016].

2. Yahoo! Finance. (2016). The Sherwin-Williams Company. [online] Available at: http://finance.yahoo.com/q?s=SHW [Accessed 14 Jun. 2016].

Frankie:

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EVALUATION OF PORTFOLIO BETA AND THE REQUIRED RETURN ON STOCK

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 part of the project, you get financial information using Yahoo!Finance (found at http://finance.yahoo.com/ )

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". Scroll down this page to find the stock's beta.

In your initial response to the topic you have to answer all 5 questions.

You are expected to make your own contribution in a main topic as well as respond with value added comments to at least two of your classmates as well as to your instructor.

From Yahoo!Finance obtain a report on any two companies.

1. What are the betas listed for these companies? Starbucks Beta is 0.72 and General Mills 0.67

2. If you made an equal dollar investment in each stocks what would be the beta of your portfolio? The beta portfolio is the beta of investments assets that an individual or organization holds, and is used as a measurement of performance for evaluation what risk a company may have. The beta portfolio with equal percentage investment =0.50*0.67+0.50*0.72=0.70

3. If you made 70% of dollar investment in stock A, and 30% of dollar investment in stock B, what would be the beta of your portfolio? Please how your work.

.70*.67+.70*0.72=0.69

4. Apply the Capital Asset Pricing Model (CAPM) Security Market Line to estimate the required return on these two stocks. Assumptions and Data: Note that you will need the risk-free rate and the market risk premium. Assume a 5% market risk premium. To get the current yield on 10-year Treasury securities go to Finance!Yahoo’s (www.finance.yahoo.com) -click on Market Data - Bonds. You will use the current yield on 10-year Treasury securities as the risk-free rate to estimate the required rate of return on stocks. Please show your work.

General Mills = 1.58+0.67(5) =4.93%

Starbucks = 1.58+0.72(5)= 5.18%

Compare the required return on these stocks calculated using CAPM in question #4 against their historical return over the last 52 weeks, found in the Yahoo!Finance - Key Statistics. Is there a difference between these returns? Is this a problem? Why is there a difference? General mills 52 week is 16.19% and Starbucks is 2.29%. There is a significant difference in General Mills as oppose to Starbucks return of stock. These number are probably a result of the investors not receiving fair returns on their investments. Expected and required returns are future and realized returns are historical so there doesn’t seem to be much of a problem.