FIN 534 – Financial Management
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 selected in Assignment 1 were Adobe Systems Inc.,(ADBE) and Alaska Air Group, Inc. (ALK) The beta for ADBE is currently 1.03 and the beta for ALK is currently 0.69. From the beta, which tell me the volatility of the stock in relation to the market, I learn that ALK stock is a lot less volatile than the market and ADBE stock is a lot more volatile than the market. In simple terms, if the stock market went up 10% today, ALK stock would earn a lot less than ADBE stock would, simple because it has a lower risk level: The lower the risk, the lower the reward. ALK would be a great long-term stock to invest in because there are slow, steady gains throughout the term of investment.
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.
Historical Average ALKADBE
201414.63%3.06%
201519.74%6.62%
201611.99%11.81%
| ALK Stock | Realized | ADBE Stock | Realized | ||||
| Year | return | Year | return | ||||
| 2014 | 15% | 2014 | 3.06% | ||||
| 2015 | 20% | 2015 | 6.62% | ||||
| 2016 | 12% | 2016 | 11.81% | ||||
| Average = | 15.5% | Average = | 7.16% | ||||
| Standard deviation = | 3.9% | Standard deviation = | 4.40% | ||||
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