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Date
10/3/11
9/1/11
8/1/11
7/1/11
6/1/11
5/2/11
4/1/11
3/1/11
2/1/11
1/3/11
12/1/10
11/1/10
10/1/10
9/1/10
8/2/10
7/1/10
6/1/10
5/3/10
4/1/10
3/1/10
2/1/10
1/4/10
12/1/09
11/2/09
10/1/09
9/1/09
8/3/09
7/1/09
6/1/09
5/1/09
4/1/09
3/2/09
2/2/09
1/2/09
12/1/08
11/3/08

MSFT
SP500
Tbill
returns
returns
Monthly
6.99%
10.77% 0.0000%
6.43%
7.18% 0.0008%
2.31%
5.68% 0.0008%
5.38%
2.15% 0.0075%
3.98%
1.83% 0.0008%
2.89%
1.35% 0.0033%
2.07%
2.85% 0.0033%
4.46%
0.10% 0.0075%
3.60%
3.20% 0.0117%
0.62%
2.26% 0.0117%
10.49%
6.53% 0.0100%
4.73%
0.23% 0.0133%
8.92%
3.69% 0.0092%
4.37%
8.76% 0.0133%
8.59%
12.14%
10.79%
15.15%
4.28%
2.17%
2.21%
7.54%
3.61%
6.56%
7.80%
4.37%
5.36%
1.06%
13.83%
3.76%
10.24%
13.74%
4.86%
12.05%
3.84%
8.88%

4.74%
6.88%
5.39%
8.20%
1.48%
5.88%
2.85%
3.70%
1.78%
5.74%
1.98%
3.57%
3.36%
7.41%
0.02%
5.31%
9.39%
8.54%
10.99%
8.57%
0.78%
7.48%

0.0117%
0.0117%
0.0142%
0.0125%
0.0133%
0.0125%
0.0100%
0.0058%
0.0042%
0.0042%
0.0042%
0.0100%
0.0108%
0.0142%
0.0150%
0.0108%
0.0100%
0.0167%
0.0208%
0.0183%
0.0100%
0.0017%

MSFT
S&P
minust minusT
bill
Bill
0.070
0.108
0.064
0.072
0.023
0.057
0.054
0.022
0.040
0.018
0.029
0.014
0.021
0.028
0.045
0.001
0.036
0.032
0.006
0.023
0.105
0.065
0.047
0.002
0.089
0.037
0.044
0.087
0.086
0.121
0.108
0.152
0.043
0.022
0.022
0.075
0.036
0.066
0.078
0.044
0.053
0.011
0.138
0.037
0.102
0.137
0.049
0.121
0.039
0.089

0.048
0.069
0.054
0.082
0.015
0.059
0.028
0.037
0.018
0.057
0.020
0.036
0.033
0.074
0.000
0.053
0.094
0.085
0.110
0.086
0.008
0.075

GetyourdatafromYahooFinanceasdoneinProject1
Downloadtheprevious36monthpricehistoryforyourstocks
Calculatethereturns,monthovermonth
DothesameforreturnsoftheS&P500andthe3monthTbillrate
^GSPC
S&PtickeratYahoo
^IRX
Symbolforthe13monthTbill
note^IRXisannual%,i.e.0.1=0.1%.Tousethis,youmust
convertittoamonthlydecimal^IRXvalue/100/12
SubtracttheTbillreturnfromboththestockandS&Preturn
WetaketheCAPMequation,E(Rs)=rf+ [E(RM)rf]
andthencalculateBetausing :E(Rs)rf= [E(RM)rf]
inoneofafewways
1)
2)
3)

=SLOPE(stockreturns,S&Preturns)
0.9728172
0.9727554
=COVAR(stockreturns,S&Preturns)/VARP(S&Preturns)
0.9728172
Doaregressionusing
DATADATAANALYSISREGRESSION
[notethisAddInmayneedtobeinstalled]
0.9728172 beta
thisisidenticaltousingtheSLOPEcalculation,but
itproducesmoreoutput(below)
0.0010648 intercept
thisestimatesyourriskfreerate
0.0127779 annualized(i.e.aboveisthemonthly
riskfreerate)

SUMMARYOUTPUT
RegressionStatistics
MultipleR
RSquare
AdjustedRSquare
StandardError
Observations

0.7355
0.5409
0.5274
0.0515
36

ANOVA
df
Regression
Residual
Total

Intercept
XVariable1

1
34
35

Significance
F
SS
MS
F
0.1062 0.1062 40.0596
0.0000
0.0901 0.0027
0.1963

Standard
Coefficients
Error
tStat Pvalue Lower95%
0.0011
0.0087 0.1226 0.9031
0.0166
0.9728
0.1537 6.3293 0.0000
0.6605

Upper
95%
0.0187
1.2852

Lower
95.0%
0.0166
0.6605

Upper
95.0%
0.0187
1.2852

GiventheBetacalculated,howmightyoucalculate"k,"therequiredrateofreturn
foryourstocks?
EstimateanexpectedreturnfortheS&P
E(RS&P) =theaveragemonthlyreturnforthepastthree
years
0.008743 *12
=
10.5%
Estimatetheannualriskfreereturnthesameway
(thisissimplisticbutisacceptableforthisexercise)
rf=

0.11%

NowplugthatintotheequationfortheCAPMtoestimatethestock's
return
E(Rs)= rf+[E(RM)rf]

THEREFORE

E(Rs)=

0.1%+

E(Rs)=

10.2%

k=

0.97

(10.5%

0.1%)

10.2% (forMSFTinthiscase)

Notethatotherprofessorsmaysuggestcalculatingbetausingweeklyordailydata.
Theperiodsusedcanrangefrom6monthsfordailyto5yearsformonthlyorweekly.
Allareacceptable.Usually,thereisnotasignificantdifferencebetweenthem.The
recentfinancialcrisismeanstheperiodusedmayresultinwidevariationinbeta.