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Chapter 5: Risk and Return
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 Exercise 5.1 The Market Portfolio

Most investment analysts use a surrogate, such as the Standard & Poor's 500 Stock Price Index (S&P 500), to represent the market portfolio. S&P Global Data will help you learn more about the S&P 500. A visit there will give you specific information about the composition of the S&P 500.

Q. Which industry group (industrials, financials, transportation, or utilities) is represented by the largest(fewest) number of firms in the S&P 500? How many? Which exchange/market (AMEX, NASDAQ, or NYSE), represents the largest(fewest) number of companies in the S&P 500? How many?



 Exercise 5.2  The Characteristic Line

Problem 3 at the end of Chapter 5 in the text gives you excess quarterly return data for a company's common stock and for the market portfolio. Using this information, you are asked to graph the relationship between the two sets of data and to draw the characteristic line. The slope of this line is the common stock's beta.

Given two sets of numbers, the Correlation and Regression Calculator can be used to calculate means, variances, regression coefficients (i.e., betas), covariance, correlation coefficient, and build a scatterplot with two regression lines (i.e., X on Y, and Y on X). Use the Correlation and Regression Calculator to draw a scatterplot of the excess security returns versus excess market returns based on the data in Problem 3. (TIP: The calculator's left-hand column is reserved for the Y, or dependent, variable. Therefore, place the excess security returns in that column. Oh, by the way, your beta value in this problem should be less than one.)

Q. What is the security's beta?



 Exercise 5.3  Beta: An Index of Systematic Risk

Using the "Stock Overview" feature on the Reuters web site (formerly, MultexInvestor and before that Market Guide) will get you a quick view of a company's key financial ratios and data plus an estimate of a company's equity beta.

Use the Reuters Investor web site to update Table 5-2 in the text.

Q. How many betas increased (decreased) by more than 10 percent of their reported value in the text? Which companies' common stock betas showed the greatest movement? Do you have any thoughts on what might have caused the betas to change?


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