ESSEN OF INVESTMENTS CONNECT AC
ESSEN OF INVESTMENTS CONNECT AC
11th Edition
ISBN: 9781266650314
Author: Bodie
Publisher: MCG
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Chapter 7, Problem 2WM
Summary Introduction

In this problem we have to get the data from yahoo finance for Alcoa and S&P 500 for 60 months and calculate their returns by using this formula:

Returns = ln(Return in current year/return in previous year)

Here ln stands for natural logarithm.

Expert Solution & Answer
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Explanation of Solution

The data is shown below:

    Date Returns Alcoa Returns S&P
    12/1/2013 0 0
    1/1/2014 0 0
    2/1/2014 0.019785587 0.042213375
    3/1/2014 0.094520691 0.006908249
    4/1/2014 0.045565745 0.006181643
    5/1/2014 0.010340052 0.020812196
    6/1/2014 0.09213958 0.018878997
    7/1/2014 0.09598186 -0.015194687
    8/1/2014 0.013333413 0.036963644
    9/1/2014 -0.029980428 -0.015635436
    10/1/2014 0.040797065 0.022936399
    11/1/2014 0.031133233 0.024237474
    12/1/2014 -0.088938172 -0.004197385
    1/1/2015 -0.008906032 -0.031532779
    2/1/2015 -0.056519624 0.053438876
    3/1/2015 -0.133367024 -0.017549197
    4/1/2015 0.037969704 0.008484722
    5/1/2015 -0.071017427 0.01043673
    6/1/2015 -0.112097041 -0.021235559
    7/1/2015 -0.121939527 0.019549683
    8/1/2015 -0.043485446 -0.064624731
    9/1/2015 0.025067099 -0.026798731
    10/1/2015 -0.078577301 0.079719379
    11/1/2015 0.047029033 0.000504742
    12/1/2015 0.056257819 -0.017685659
    1/1/2016 -0.302996218 -0.052067617
    2/1/2016 0.202912827 -0.004136906
    3/1/2016 0.074574737 0.06390499
    4/1/2016 0.153553957 0.002695762
    5/1/2016 -0.18644828 0.015208367
    6/1/2016 0.002902807 0.000910506
    7/1/2016 0.135955619 0.034990433
    8/1/2016 -0.052185714 -0.001219987
    9/1/2016 0.008845955 -0.001235213
    10/1/2016 -0.12794767 -0.019616837
    11/1/2016 0.301002453 0.033603545
    12/1/2016 -0.027282474 0.018037111
    1/1/2017 0.260883907 0.017726315
    2/1/2017 -0.052376863 0.036523001
    3/1/2017 -0.005508 -0.000389273
    4/1/2017 -0.019668973 0.009050132
    5/1/2017 -0.023699955 0.011509759
    6/1/2017 -0.008842777 0.004802226
    7/1/2017 0.108723913 0.019164018
    8/1/2017 0.186889829 0.000546284
    9/1/2017 0.060570954 0.019119039
    10/1/2017 0.024577509 0.02194556
    11/1/2017 -0.121820059 0.003713141
    12/1/2017 0.241786656 0.033766015
    1/1/2018 -0.034945458 0.054657399
    2/1/2018 -0.145632637 -0.039726108
    3/1/2018 -0.00022244 -0.027252497
    4/1/2018 0.129966368 0.002715086
    5/1/2018 -0.06308127 0.021378191
    6/1/2018 -0.025067115 0.004830749
    7/1/2018 -0.080131612 0.035387951
    8/1/2018 0.031842536 0.029814315
    9/1/2018 -0.100472256 0.004285093
    10/1/2018 -0.143767471 -0.071929346
    11/1/2018 -0.095281689 0.017701752
    12/1/2018 -0.098711084 -0.047137951

For First half of the data that is for 30 months, we run the regression between Alcoa and S&P to get this as an output.

Regression equation for the first 30 months is

Y = 0.6203X − 0.0098

From this equation the

Beta = slope of regression line = 0.6203

Alpha = intercept of regression line = 0.0098

ESSEN OF INVESTMENTS CONNECT AC, Chapter 7, Problem 2WM , additional homework tip  1

For next half of the data that is for 30 months, we run the regression between Alcoa and S&P to get this as an output.

Regression equation for the first 30 months is

Y = 1.9944X − 0.0058

From this equation the

Beta = slope of regression line = 0.1.9944

Alpha = intercept of regression line = 0.0058

ESSEN OF INVESTMENTS CONNECT AC, Chapter 7, Problem 2WM , additional homework tip  2

Conclusion

From this we can interpret that the for the first 30 months beta is quite lower as compared to the next 30 months. Also Alpha increased from negative 0.0098 to negative 0.0058 for the last 30 months meaning that the stock became more volatile and riskier and was giving more returns.

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Chapter 7 Solutions

ESSEN OF INVESTMENTS CONNECT AC

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Portfolio return, variance, standard deviation; Author: MyFinanceTeacher;https://www.youtube.com/watch?v=RWT0kx36vZE;License: Standard YouTube License, CC-BY