Risk and Return
The goal of this project is to explore the topic of risk and return. The project requires you to work in Excel with the provided spreadsheet. Be sure to fill in the yellow boxes in the Excel file for full credit. In addition, type up a report in Word with an introduction (description of the project), findings (answer assignment questions, plots, etc.), and conclusion (conclusions, summary). Your grade will depend on both quantity and quality. Upon completion, please submit both your Word report and Excel file to blackboard. Each question (A, B, C, D, E, F, and G) is worth 8 points (total of 56 points), the report 10 points, and the Excel file 9 points.
Use the following data to explore the risk-return relation and the concept of beta for Apple stock, Alphabet (Google) stock, and the S&P 500 market index:
|
Year
|
Apple Stock Price
|
Alphabet Stock Price
|
S&P 500 Market Index
|
|
2016
|
$115.82
|
$807.80
|
2238.83
|
|
2015
|
$105.26
|
$765.84
|
2043.94
|
|
2014
|
$113.99
|
$521.51
|
2058.90
|
|
2013
|
$80.01
|
$559.76
|
1848.36
|
|
2012
|
$72.80
|
$358.17
|
1426.19
|
|
2011
|
$57.86
|
$323.37
|
1257.60
|
Part 1: Risk and Beta
A) Calculate the return each year for Apple, Alphabet, and the Market using the equation Return
= (Value this year - Value last year) / Value last year. In addition, use the Excel function to find the average of the returns
B) Calculate the standard deviation of rates of return for Apple, Alphabet, and the Market using the Excel function
C) Make a scatter plot of stock returns (y-axis) against market returns (x-axis) for both Apple and Alphabet stock in one plot. Add a linear trend line to the scatter plot for each stock and include the equation on the chart. Label the y-axis, x-axis, legend, and chart title
D) For each stock, use the Excel function to calculate the correlation between the stock returns and market returns. Furthermore, label the standard deviations and calculate the beta according to the equation, Beta = (Standard deviation of stock / Standard deviation of market)
*(Correlation between stock and market)
Part 2: Required Return
E) Calculate the expected return on the market according to Expected Return on Market = Risk- Free Rate + Market Risk Premium. Also calculate the required return for Apple and Alphabet according to Required Return = Risk-Free Rate + (Beta)(Market Risk Premium)
F) If you formed a portfolio that consisted of 50% Apple stock and 50% Alphabet stock, what would be its beta?
G) Calculate the portfolio beta of the four stock portfolio and the required return on the portfolio
Attachment:- Project - Risk and Return.xlsx