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Note IRX Is Annual %, I.E. 0.1 0.1%. To Use This, You Must Convert It To A Monthly Decimal IRX Value / 100 / 12

This document contains monthly stock return data for Microsoft (MSFT), the S&P 500 index, and 3-month T-bill rates from November 2008 to October 2011. It then calculates beta for MSFT by regressing its excess returns against the market excess returns. The beta is estimated to be 0.97, indicating that MSFT tends to move nearly as much as the overall market. Using this beta along with estimated future market returns of 10.5% and a risk-free rate of 0.1%, the required rate of return or cost of capital k for MSFT is calculated to be approximately 10.2%.

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k10924
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51 views3 pages

Note IRX Is Annual %, I.E. 0.1 0.1%. To Use This, You Must Convert It To A Monthly Decimal IRX Value / 100 / 12

This document contains monthly stock return data for Microsoft (MSFT), the S&P 500 index, and 3-month T-bill rates from November 2008 to October 2011. It then calculates beta for MSFT by regressing its excess returns against the market excess returns. The beta is estimated to be 0.97, indicating that MSFT tends to move nearly as much as the overall market. Using this beta along with estimated future market returns of 10.5% and a risk-free rate of 0.1%, the required rate of return or cost of capital k for MSFT is calculated to be approximately 10.2%.

Uploaded by

k10924
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Date
10/3/11
9/1/11
8/1/11
7/1/11
6/1/11
5/2/11
4/1/11
3/1/11
2/1/11
1/3/11
12/1/10
11/1/10
10/1/10
9/1/10
8/2/10
7/1/10
6/1/10
5/3/10
4/1/10
3/1/10
2/1/10
1/4/10
12/1/09
11/2/09
10/1/09
9/1/09
8/3/09
7/1/09
6/1/09
5/1/09
4/1/09
3/2/09
2/2/09
1/2/09
12/1/08
11/3/08

MSFT
SP500
Tbill
returns
returns
Monthly
6.99%
10.77% 0.0000%
6.43%
7.18% 0.0008%
2.31%
5.68% 0.0008%
5.38%
2.15% 0.0075%
3.98%
1.83% 0.0008%
2.89%
1.35% 0.0033%
2.07%
2.85% 0.0033%
4.46%
0.10% 0.0075%
3.60%
3.20% 0.0117%
0.62%
2.26% 0.0117%
10.49%
6.53% 0.0100%
4.73%
0.23% 0.0133%
8.92%
3.69% 0.0092%
4.37%
8.76% 0.0133%
8.59%
12.14%
10.79%
15.15%
4.28%
2.17%
2.21%
7.54%
3.61%
6.56%
7.80%
4.37%
5.36%
1.06%
13.83%
3.76%
10.24%
13.74%
4.86%
12.05%
3.84%
8.88%

4.74%
6.88%
5.39%
8.20%
1.48%
5.88%
2.85%
3.70%
1.78%
5.74%
1.98%
3.57%
3.36%
7.41%
0.02%
5.31%
9.39%
8.54%
10.99%
8.57%
0.78%
7.48%

0.0117%
0.0117%
0.0142%
0.0125%
0.0133%
0.0125%
0.0100%
0.0058%
0.0042%
0.0042%
0.0042%
0.0100%
0.0108%
0.0142%
0.0150%
0.0108%
0.0100%
0.0167%
0.0208%
0.0183%
0.0100%
0.0017%

MSFT
S&P
minust minusT
bill
Bill
0.070
0.108
0.064
0.072
0.023
0.057
0.054
0.022
0.040
0.018
0.029
0.014
0.021
0.028
0.045
0.001
0.036
0.032
0.006
0.023
0.105
0.065
0.047
0.002
0.089
0.037
0.044
0.087
0.086
0.121
0.108
0.152
0.043
0.022
0.022
0.075
0.036
0.066
0.078
0.044
0.053
0.011
0.138
0.037
0.102
0.137
0.049
0.121
0.039
0.089

0.048
0.069
0.054
0.082
0.015
0.059
0.028
0.037
0.018
0.057
0.020
0.036
0.033
0.074
0.000
0.053
0.094
0.085
0.110
0.086
0.008
0.075

GetyourdatafromYahooFinanceasdoneinProject1
Downloadtheprevious36monthpricehistoryforyourstocks
Calculatethereturns,monthovermonth
DothesameforreturnsoftheS&P500andthe3monthTbillrate
^GSPC
S&PtickeratYahoo
^IRX
Symbolforthe13monthTbill
note^IRXisannual%,i.e.0.1=0.1%.Tousethis,youmust
convertittoamonthlydecimal^IRXvalue/100/12
SubtracttheTbillreturnfromboththestockandS&Preturn
WetaketheCAPMequation,E(Rs)=rf+ [E(RM)rf]
andthencalculateBetausing :E(Rs)rf= [E(RM)rf]
inoneofafewways
1)
2)
3)

=SLOPE(stockreturns,S&Preturns)
0.9728172
0.9727554
=COVAR(stockreturns,S&Preturns)/VARP(S&Preturns)
0.9728172
Doaregressionusing
DATADATAANALYSISREGRESSION
[notethisAddInmayneedtobeinstalled]
0.9728172 beta
thisisidenticaltousingtheSLOPEcalculation,but
itproducesmoreoutput(below)
0.0010648 intercept
thisestimatesyourriskfreerate
0.0127779 annualized(i.e.aboveisthemonthly
riskfreerate)

SUMMARYOUTPUT
RegressionStatistics
MultipleR
RSquare
AdjustedRSquare
StandardError
Observations

0.7355
0.5409
0.5274
0.0515
36

ANOVA
df
Regression
Residual
Total

Intercept
XVariable1

1
34
35

Significance
F
SS
MS
F
0.1062 0.1062 40.0596
0.0000
0.0901 0.0027
0.1963

Standard
Coefficients
Error
tStat Pvalue Lower95%
0.0011
0.0087 0.1226 0.9031
0.0166
0.9728
0.1537 6.3293 0.0000
0.6605

Upper
95%
0.0187
1.2852

Lower
95.0%
0.0166
0.6605

Upper
95.0%
0.0187
1.2852

GiventheBetacalculated,howmightyoucalculate"k,"therequiredrateofreturn
foryourstocks?
EstimateanexpectedreturnfortheS&P
E(RS&P) =theaveragemonthlyreturnforthepastthree
years
0.008743 *12
=
10.5%
Estimatetheannualriskfreereturnthesameway
(thisissimplisticbutisacceptableforthisexercise)
rf=

0.11%

NowplugthatintotheequationfortheCAPMtoestimatethestock's
return
E(Rs)= rf+[E(RM)rf]

THEREFORE

E(Rs)=

0.1%+

E(Rs)=

10.2%

k=

0.97

(10.5%

0.1%)

10.2% (forMSFTinthiscase)

Notethatotherprofessorsmaysuggestcalculatingbetausingweeklyordailydata.
Theperiodsusedcanrangefrom6monthsfordailyto5yearsformonthlyorweekly.
Allareacceptable.Usually,thereisnotasignificantdifferencebetweenthem.The
recentfinancialcrisismeanstheperiodusedmayresultinwidevariationinbeta.

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