Compute and explain Apple's beta

Solution Preview

See attached file.

As you may suspect, the equation for the CAPM is the equation for a straight line: Y=a+bX . In other words, once we have the needed information, we can use simple regression analysis to arrive at a beta (regression coefficient) for a given stock. To do so, we need two sets of data over a given time period: Rates of returns for both a stock and "the market"- as represented by either DJI or S&P Indices- over the same time period. This project requires you to conduct a regression analysis using Excel and to find the beta for the publicly-traded Apple Computers Corporation. You will also be asked to demonstrate your understanding of some of the key investment-related issues.

To get started on the project you are being provided with the information that need. (Tabled Data Below). As you see from the following pages, using Yahoo Finance at http://finance.yahoo.com/ , you are given the monthly stock prices for both Apple and DJIA. The two data sets given here contain over 40 monthly prices (covering over 3.5 years of stock price data). You need 37 such observations covering January 2000 through January 2003 to finish your project. Furthermore, you may actually go to the above site and download such data in Excel Spreadsheet format. This saves you time for entering data manually. The ticker symbol for Apple is AAPL and for DJI is DJI. Use Yahoo Finance's "Historical Prices" hot link to get the prices first and then convert such prices into returns (%) as you have learned in this class. Use the three-year time periods specified above. Then answer the following questions:

1. What is Apple's beta given the 36-month data specified for this project?
Apple's beta is .967 as calculated in the excel file.

2. Interpret your calculated beta. What does this figure show? Explain.

According to the Wikipedia

The Beta coefficient, is a measure of volatility of a stock or portfolio in relation to the rest of the financial market.
An asset with a beta of 0 means that its price is not at all correlated with the market; that asset is independent. A positive beta means that the asset generally follows the market. A negative beta shows that the asset inversely follows the market; the asset generally decreases in value if the market goes up.
http://en.wikipedia.org/wiki/Beta_coefficient as retrieved on 28 Feb 2008 08:06:53 GMT.

As per Investopedia" Beta is calculated using regression analysis, and you can think of beta as the tendency of a security's returns to respond to swings in the market. A beta of 1 indicates that the security's price will move with the market. ...