1. Highlight the columns of S&P 500 returns and your first stock returns, including the column headings.
2. From the Insert group choose to insert a Scatter chart With Only Markers. A chart graphing the returns of your stock against the market returns should appear. Place it next to your columns of returns.
3. Right click on any one of the markers in the chart and choose Add Trendline. Then choose Display Equation on chart in the Format Trendline window.
4. An estimate of the stock’s beta is the slope coefficient of the trendline. In the example, betaBA equals 1.4171.
5. Repeat the process to graph your second stock returns against the S&P 500 returns, and find the second beta. There are at least two ways to do this:
a. You can highlight the S&P 500 returns, press and hold the Control button while you highlight your second stock returns, and repeat the above steps, or
b. Copy your first chart and paste it below it. When the chart is chosen, the S&P 500 and your first stock returns will be outlined on the spread sheet. Simply drag the outline from the first stock returns over to the second stock returns. (Make sure the first stock returns are not in the outline.)
i. You may need to delete the new equation and trendline and recreate it if it does not change to fit the new data.
6. Make the two charts visually comparable by adjusting the vertical axis parameters; equate their maximum and minimum values. I did this by right clicking the numbers on the vertical axis and choosing “Format Axis.” For both charts, I set the Maximum to Fixed and changed it to 0.4 (which is 40%), and I set the Minimum to Fixed and changed it to ‒0.4.
I. a. How do the betas from the charts compare to the betas you calculated using regression from the Chapter 2 assignment? Are they the same?
I. b. Does the steepness of each line reflect the respective beta? Do they reflect the general relationship between the two stocks’ returns with the market returns? Describe.
A) Charting attainable portfolios
Find the attainable portfolios containing your two stocks.
Start by bringing information together.
7. In cell N32 type “=G30*12.” (the cell address of the average monthly return of your first stock). Multiplying by 12 annualizes the monthly average return.
8. Set cell N33 equal to the first stock’s annualized standard deviation by typing “=G29*12^0.5” (the cell address of your first stock’s standard deviation.) The carat raises the number 12 to the ½ power; i.e., it takes the square root of 12.
9. Highlight and drag and copy cells N29 and N30 over to column O. You should see the average annual returns and standard deviations for both stocks.
10. In cell N34 type “=G47”, the cell containg the correlation of your two stocks.
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