Homework Set #3: Chapters 6, 7, & 8
Due Week 6 and worth 100 points
Directions: Answer the following questions on a separate document. Explain how you reached the answer or show your work if a mathematical calculation is needed, or both. Submit your assignment using the assignment link above.
A. Using the two stocks you selected from Homework #1, identify the Beta for each stock. In your own words, what conclusion can you draw from the stocks’ current and historical beta? If the stock market went up 10% today, what would be the impact on each of your stocks?
The two stocks I chose are two of the biggest powerhouses behind smartphones, Apple and Samsung. Apple’s beta is 1.21 and Samsung’s beta is 1.06. Based on the current and historical beta of both companies, if an investor held stock for both, Apple would contribute a bit more risk to their portfolio than Samsung. The betas for both companies tend to stay around the same area, but there are times when Apple’s beta is excessive compared to Samsung and vice versa.
| Samsung | Apple | |
| July 3 | 1.17 | 1.00 |
| August 2 | 2.30 | 1.94 |
| September 5 | 1.18 | 0.69 |
| October 3 | 0.14 | 2.07 |
| November 1 | 0.60 | 1.07 |
| November 8 | -0.08 | 3.26 |
| November 11 | 1.06 | 1.21 |
As you can see from the table, earlier this month Samsung had a negative beta while Apple had a beta of 3.26. In other words, if the market went down, then Samsung investments would go up while Apple would prove to be extremely risky to the portfolio in comparison. One can also see that in the beginning of October, it was riskier to hold an investment in Apple (2.07) than it was to hold one in Samsung (0.14). If the stock market went up 10% today, then the return on Apple stocks would be slightly higher than those on Samsung stocks. If the stock market went up in early August then Samsung would have a greater risk but potential for higher gains, whereas Apple would have less risk and lower returns in comparison. The higher a beta is the more risk the stock poses to one’s portfolio, but the greater the potential for higher gains. The lower a beta is the less risk the stock poses to the portfolio, but the potential gains are a lot lower.
B. Using the 2014 financial statements from your stocks above and the equations from your textbook, prepare the Historical Average and Standard Deviation for each stock.
Apple:
| Year | Return |
| 2014 | 48% |
| 2015 | -5% |
| 2016 | 19% |
| 2017 | 46% |
Samsung:
| Year | Return |
| 2014 | 1% |
| 2015 | -5% |
| 2016 | 50% |
| 2017 | 41% |
References
Brigham & Ehrhardt. (2017). Financial Management: Theory and Practice (15th ed).
Boston, MA: Cengage Learning.
McClure, B. (2017). Beta: Know the Risk. Retrieved from
https://www.investopedia.com/investing/beta-know-risk/.
Yahoo Finance. (2018). Apple Inc. Retrieved from
https://finance.yahoo.com/quote/AAPL?p=AAPL.
Yahoo Finance. (2018). Samsung Electronics Co., Ltd. Retrieved from
https://finance.yahoo.com/quote/005930.KS?p=005930.KS.
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