Discussion Questions
1. Begin by taking a look at the historical performance of the overall stock market. If you
want to see, for example, the performance of the S&P 500, select INDICES and enter
S&PCOMP. Click on PERFORMANCE and you will immediately see a quick summary
of the market’s performance in recent months and years. How has the market per-
formed over the past year? The past 3 years? The past 5 years? The past 10 years?
2. Now let’s take a closer look at the stocks of four companies: Colgate Palmolive (Ticker
CL), Gillette (G), Merrill Lynch (MER), and Microsoft (MSFT). Before looking at the
data, which of these companies would you expect to have a relatively high beta
(greater than 1.0), and which of these companies would you expect to have a rela-
tively low beta (less than 1.0)?
3. Select one of the four stocks listed in question 2 by selecting COMPANIES, entering
the company’s ticker symbol, and clicking on GO. On the overview page, you should
see a chart that summarizes how the stock has done relative to the S&P 500 over the
past 6 months. Has the stock outperformed or underperformed the overall market
during this time period?
4. Return to the overview page for the stock you selected. If you scroll down the page
you should see an estimate of the company’s beta. What is the company’s beta? What
was the source of the estimated beta?
5. Click on the tab labeled PRICES. What is the company’s current dividend yield? What
has been its total return to investors over the past 6 months? Over the past year?
Over the past 3 years? (Remember that total return includes the dividend yield plus
any capital gains or losses.)
6. What is the estimated beta on this page? What is the source of the estimated beta?
Why might different sources produce different estimates of beta? [Note if you want to
see even more beta estimates, click OVERVIEWS (on second line of tabs) and then
select the SEC DATABASE MARKET DATA. Scroll through the STOCK OVERVIEW
SECTION and you will see a range of different beta estimates.]
7. Select a beta estimate that you believe is best. (If you are not sure, you may want to
consider an average of the given estimates.) Assume that the risk-free rate is 5 per-
cent and the market risk premium is 6 percent. What is the required return on the
company’s stock?
8. Repeat the same exercise for each of the 3 remaining companies. Do the reported
betas confirm your earlier intuition? In general, do you find that the higher-beta
stocks tend to do better in up markets and worse in down markets? Explain