Estimating Beta for your stock
For use in Conjunction with the Firm Valuation Project
a) Collect historical price data.
You will begin by collecting historical stock price data for the company. Historical stock prices are available on the internet through at the http://finance.yahoo.com website. At this website you will put the ticker symbol for your company in the symbol box and press “go”. At this point you will see a page that has financial information about your company. On the left-hand side of the screen there will be a series of option which you can choose to get more information about your company. At this point you want to look under “quotes” and choose “historical prices”.
At this point, you will be given some options about the time period and frequency of the data you are collecting. You want monthly data beginning January 1, 2012 and ending December 31, 2015. Once you have specified this time period, push the “get prices” button. After the historical price information appears, you will see an option “download to spreadsheet” at the bottom of the historical price table. Select this option to bring the information into an excel file.
b) Collect historical S&P500 data.
We would like to compare the activity of an individual company’s stock price to how stock prices are doing in the market overall. We will use the S&P500 as our benchmark for overall stock market performance. Just as we gathered historical stock prices, we can gather historical S&P500 data using the http://finance.yahoo.com website. To do this, use the same procedure as above, but instead of using your company’s ticker symbol, type “^GSPC” in the symbol box. Collect monthly S&P500 data for the January 1, 2012 and ending December 31, 2015 time period and save the information in an excel file.
Now that you have the information in an excel file, you can use your excel skills to manipulate it as you need. We will be using the “adjusted close” column for both of your company stock and S&P500.
c) Calculate monthly returns.
Monthly returns report gains or losses in percentage terms. For example, we will look at our sample company Valero Energy, VLO. Assume that I bought VLO stock at the beginning of January for $23.09 per share. If I wanted to sell the same share one month later, at the beginning of February, I would have been able to sell it for $22.76. Thus, I would have lost $0.33.
Looking at percentage returns gives us an ability to compare how poorly (or well) this VLO investment did relative to other investments. For example, let’s take a hypothetical company, Roadrunner Enterprises. Assume that Roadrunner’s stock was selling for $200 a share at the beginning of January. By the beginning of February, the stock was selling for only $199. If you had bought one share of Roadrunner stock over this time period, you would have lost $1.00. In absolute (dollar) terms, you would have lost more on the Roadrunner investment.
However, looking at percentage returns, we get a different (and more accurate) picture.
(P2-P1)/P1 = (22.76-23.09)/23.09 = – 0.01429 or -1.429%
(P2-P1)/P1 = (199-200)/200 = -0.005 or -0.5%
This allows us to compare different investments relative to the amount of money we have invested in the stock. For example, if we had had $10,000 at the beginning of January and invested it all in VLO, we would have lost ($10,000)*0.01429 or $142.90. If, instead, we had invested the money in Roadrunner, we would have lost only ($10,000)*.005 or $50.
Using excel, calculate monthly returns for both your stock and the S&P500 for each month beginning January 1, 2012 and ending December 31, 2015. Calculating these returns will require the “Adjusted Close” for each month-end from beginning January 1, 2012 and ending December 31, 2015.
d) Manipulate Data and Regression Analysis.
There are several methods for calculating a regression in excel. For this assignment, we will use the charting capability to calculate beta for our stock. You will begin by choosing the “insert” option above the excel spreadsheet. You will choose “chart” and then “XY (scatter)” for the type of chart. The chart wizard will guide you through the process.
You will want to choose the “series” option to tell excel what data you want to use. Be sure to use your S&P500 return column for your “X value” and your stock return column for your “Y value”.
This process will give you a scatter graph that plots your stock’s return and the S&P500 return. However, it does not give you a regression line or slope. To get a regression line, you will need to click your left mouse key to make several of the data points turn yellow. With your mouse pointing to one of these yellow data points, right click your mouse. Choose “add trendline”. We will use the default (linear) trend line. However, you will want to choose “options” so that you can place “display equation on chart”.
You may find that your regression equation is difficult to read if it is placed over the data points. You can move this equation to the side of the graph (it is in a text box) so that it will be easier to read.
Make sure that you have properly labeled your graph and that your graph has a title.