Fundamental Toys Inc. is looking to expand its stock portfolio. You receive an urgent text message from Bob:
I need you to analyze a Stock X as a possible investment candidate for the company's stock portfolio. The CFO has asked me to make a decision ASAP. I left the data you need on your desk.
Fortunately, Excel has the capability of performing regression analysis with built-in algorithms. This frees the analyst from complicated algebraic formulations and data management.
The following data has been collected to help you run a linear regression between Stock X and the New York Stock Exchange (NYSE) on which Stock X is traded. Use CAPM as the investment decision model.
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Data from Bob
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Historical Rates of Return
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Year
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NYSE
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Stock X
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1
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(30%)
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(19.0%)
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2
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32.5
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20.5
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3
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21.6
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16.5
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4
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(9.8)
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0.5
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5
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7.8
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9.7
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6
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22
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20.5
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7
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33.5
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19.8
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(Source: Intermediate Financial Management, Brigham and Davies, 10th edition)
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The NYSE is the independent variable, X-axis, which is the proxy market portfolio. Stock X is the dependent variable, Y-axis. Also, assume a market return (NYSE) of 12%, the risk-free rate of 4% and the market return of Stock X of 7.85%.
Submit the following items in to the online drop box.
- The Excel regression function (the regression equation).
- The SML constructed from the risk-free rate, beta (slope of the regression function), and the market return provided above.
- Your conclusion on the stock purchase given your CAPM analysis and the market return of Stock X. Provide support for your decision.