10-31 Excel Problem As discussed in the text, beta estimates for one firm will vary depending on various

factors like, the time over which

the estimation is conducted, the market portfolio proxy, and the return intervals. You will demonstrate this variation using
returns for Microsoft.
A. Using all 45 monthly returns for Microsoft and the three stock market indices, compute Microsofts beta using the S&P 500
Index as the market proxy. Then compute the beta using the DJIA and the Nasdaq indices as the market portfolio proxy.
Compare the three beta estimates.
B. Now estimate the beta using only the most recent 30 monthly returns and the S&P 500 Index. Compare the beta estimate to
the estimate in part A when using the S&P 500 Index and all 45 monthly returns.
Date

MSFT

S&P500

DJIA

Nasdaq

Date

MSFT

S&P500

DJIA

Nasdaq

Date

MSFT

S&P500

DJIA

Nasdaq

Jun 2007

4.45%

3.07%

4.04%

4.19%

Mar 2006

-11.22%

1.22%

2.32%

-0.74%

Dec 2004

-1.66%

-2.53%

-2.72%

-5.20%

May 2007

-3.98%

-1.78%

-1.61%

-0.05%

Feb 2006

1.25%

1.11%

1.05%

2.56%

Nov 2004

-0.31%

3.25%

3.40%

3.75%

Apr 2007

2.85%

3.25%

4.32%

3.15%

Jan 2006

-4.21%

0.05%

1.18%

-1.06%

Oct 2004

6.80%

3.86%

3.99%

6.17%

Mar 2007

7.42%

4.33%

5.74%

4.27%

Dec 2005

7.61%

2.55%

1.37%

4.56%

Sep 2004

1.17%

1.40%

-0.52%

4.12%

Feb 2007

-1.07%

1.00%

0.70%

0.23%

Nov 2005

-5.50%

-0.10%

-0.82%

-1.23%

Aug 2004

1.31%

0.94%

-0.92%

3.20%

Jan 2007

-8.38%

-2.18%

-2.80%

-1.94%

Oct 2005

8.01%

3.52%

3.50%

5.31%

Jul 2004

-3.89%

0.23%

0.34%

-2.61%

Dec 2006

3.34%

1.41%

1.27%

2.01%

Sep 2005

-0.12%

-1.77%

-1.22%

-1.46%

Jun 2004

-0.28%

-3.43%

-2.83%

-7.83%

Nov 2006

1.71%

1.26%

1.97%

-0.68%

Aug 2005

-6.02%

0.69%

0.83%

-0.02%

May 2004

8.90%

1.80%

2.42%

3.07%

Oct 2006

2.60%

1.65%

1.17%

2.75%

Jul 2005

7.22%

-1.12%

-1.50%

-1.50%

Apr 2004

0.40%

1.21%

-0.36%

3.47%

Sep 2006

4.99%

3.15%

3.44%

4.79%

Jun 2005

3.10%

3.60%

3.56%

6.22%

Mar 2004

4.82%

-1.68%

-1.28%

-3.71%

Aug 2006

6.41%

2.46%

2.62%

3.42%

May 2005

-3.70%

-0.01%

-1.84%

-0.54%

Feb 2004

-6.05%

-1.64%

-2.14%

-1.75%

Jul 2006

7.21%

2.13%

1.75%

4.41%

Apr 2005

2.28%

3.00%

2.70%

7.63%

Jan 2004

-4.05%

1.22%

0.91%

-1.76%

Jun 2006

3.26%

0.51%

0.32%

-3.71%

Mar 2005

4.69%

-2.01%

-2.96%

-3.88%

Dec 2003

1.01%

1.73%

0.33%

3.13%

May 2006

2.86%

0.01%

-0.16%

-0.31%

Feb 2005

-3.93%

-1.91%

-2.44%

-2.56%

Nov 2003

6.47%

5.08%

6.86%

2.20%

Apr 2006

-5.86%

-3.09%

-1.75%

-6.19%

Jan 2005

-3.97%

1.89%

2.63%

-0.52%

Oct 2003

-1.64%

0.71%

-0.19%

1.45%

10-1

C. Estimate Microsofts beta using the quarterly data returns below. Compare the estimate
to the ones from part A and B.
Date
Q2
2007
Q1
2007
Q4
2006
Q3
2006
Q2
2006
Q1
2006
Q4
2005
Q3
2005
Q2
2005
Q1
2005
Q4
2004
Q3
2004
Q2
2004
Q1
2004
Q4
2003

MSFT

S&P500

3.15%

4.53%

-2.64%

3.07%

7.85%

4.38%

19.76%

7.93%

0.00%
13.90%

-2.59%

9.84%

6.05%

0.64%

-2.20%

1.55%

6.68%

-3.42%

-2.07%

4.70%

4.52%

-1.50%

2.59%

9.02%

-0.50%

-5.52%

-2.11%

5.79%

7.65%

2.39%

A. Beta estimates using different market proxies and 45 months. The estimate is from the
Excel Slope function.
S&P500 DJIA
Nasdaq
Beta =
1.206
0.952
0.716
Microsofts beta is high when compared to S&P 500 type companies and low compared to
the tech compares in the Nasdaq.

10-2

B. Beta estimate using 30 months.

S&P500
Beta =
1.420
The beta estimate is larger using the most recent 30 months compared to the full 45
months.
C. Beta estimate using quarterly returns.
S&P500
Beta =
1.085
This Microsoft beta estimate is the smallest using the quarterly S&P 500 market portfolio.
Note that the assumptions used can make a large difference in the beta estimate. This
makes beta difficult to use in practice.
Research It!
Find a Beta
Using beta as a risk measure has been fully integrated into corporate finance and the
investment industry. You can obtain a beta for most companies at many financial
websites. Sites that list a beta include: Hoovers (in the Market Data section), MSN
Money (in the Company Report section), Yahoo! Finance (in the Key Statistics section),
and Zacks (follow the Detailed Quote link). Obtain the beta for your favorite company
from several different websites. Are the values you obtain similar? If they are not, why
might they be different?
(hoovers.com, moneycentral.msn.com, finance.yahoo.com, www.zacks.com)
SOLUTION: For General Electric (GE), I found:
Yahoo! Finance beta was 0.59.
MSN Money shows a beta of 0.76.
Hoovers lists a beta of 0.8.
Zacks reports a beta of 0.83.
The beta sources may use (i) different market portfolios, (ii) different time periods, or (iii)
different time increments (annual returns versus months, weeks, etc.).
Integrated Mini Case: AT&Ts Beta
When you go on the Web to find a firms beta, you do not know how recently it was
computed, what index was used as a proxy for the market portfolio, or which time series
of returns the calculations used. Earlier in this chapter, it was shown that when we went
on the Web to find a beta for AT&T, we found the following: Hoovers (1.5), MSN Money
(1.52), Yahoo! Finance (0.50), and Zacks (1.52).

10-3

An alternative is to compute beta yourself. A common estimation procedure is to use 60

months of return data and to use the S&P500 Index as the market portfolio. You can
obtain price data for a company and for the S&P500 Index for free from websites like
Yahoo! Finance. Using monthly prices, you can compute the monthly returns, as (P n Pn1)Pn-1. Below are 60 monthly returns for AT&T and the S&P500 Index. You can use
these returns to compute AT&Ts beta. A spreadsheet, like Excel, can run a regression
(go to Tool menu, select Data Analysis, and then Regression). Select AT&T returns as
the Y Variable and S&P500 Index return as the X Variable. The coefficient for the X
Variable is the beta estimate. The regression will provide all the statistical information
you might like. However, if you only want beta, you can simply use the SLOPE function
in Excel. Or, you may have learned to run a regression using statistical software.
Date
Jun 2007
May 2007
Apr 2007
Mar 2007
Feb 2007
Jan 2007
Dec 2006
Nov 2006
Oct 2006
Sep 2006
Aug 2006
Jul 2006
Jun 2006
May 2006
Apr 2006
Mar 2006
Feb 2006
Jan 2006
Dec 2005
Nov 2005

AT&T
-2.26%
0.39%
6.77%
-0.90%
7.14%
-2.22%
6.36%
5.42%
-0.97%
6.27%
4.59%
3.81%
8.82%
7.02%
-0.59%
-1.86%
-1.97%
6.29%
7.40%
-1.66%

S&P500
Index
3.07%
-1.78%
3.25%
4.33%
1.00%
-2.18%
1.41%
1.26%
1.65%
3.15%
2.46%
2.13%
0.51%
0.01%
-3.09%
1.22%
1.11%
0.05%
2.55%
-0.10%

Date
Oct 05
Sep 05
Aug 05
Jul 05
Jun 05
May 05
Apr 05
Mar 05
Feb 05
Jan 05
Dec 04
Nov 04
Oct 04
Sep 04
Aug 04
Jul 04
Jun 04
May 04
Apr 04
Mar 04

AT&T
4.45%
0.85%
-0.45%
-1.54%
4.36%
1.58%
-1.78%
1.82%
-1.51%
1.25%
-6.60%
2.35%
-0.35%
-1.53%
0.61%
1.79%
5.86%
2.32%
-4.79%
2.70%

S&P500
Index
3.52%
-1.77%
0.69%
-1.12%
3.60%
-0.01%
3.00%
-2.01%
-1.91%
1.89%
-2.53%
3.25%
3.86%
1.40%
0.94%
0.23%
-3.43%
1.80%
1.21%
-1.68%

Date

AT&T

Feb 04
Jan 04
Dec 03
Nov 03
Oct 03
Sep 03
Aug 03
Jul 03
Jun 03
May 03
Apr 03
Mar 03
Feb 03
Jan 03
Dec 02
Nov 02
Oct 02
Sep 02
Aug 02
Jul 02

2.22%
-5.83%
-1.04%
11.95%
-2.89%
9.61%
-0.96%
-3.83%
-7.25%
0.38%
8.97%
18.28%
-3.61%
-14.85%
-9.07%
-4.88%
11.08%
29.35%
-18.76%
-10.55%

S&P500
Index
-1.64%
1.22%
1.73%
5.08%
0.71%
5.50%
-1.19%
1.79%
1.62%
1.13%
5.09%
8.10%
0.84%
-1.70%
-2.74%
-6.03%
5.71%
8.64%
-11.00%
0.49%

a. Compute AT&Ts beta using the above returns.

b. Compare your estimate with the ones found on the Web as listed above.
c. How different will be the required returns using these betas? Compute required
return using each beta (assume that the risk free rate is 5 percent and the market
return will be 13 percent).
SOLUTION:
a. Excel Regression output.

10-4

SUMMARY OUTPUT
Regression Statistics
Multiple R
0.679405
R Square
0.461591
Adjusted R Square
0.452308
Standard Error
0.053805
Observations
60
ANOVA
df
Regression
Residual
Total

Intercept
X Variable 1

1
58
59

SS
0.143951
0.167908
0.311859

Coefficient
s
-0.00177
1.568504

Standard
Error
0.007252
0.222433

MS
0.143951
0.002895

F
49.72478

Significance
F
2.4E-09

t Stat
-0.24387
7.05158

P-value
0.808194
2.4E-09

Lower 95%
-0.01629
1.123256

Upper
95%
0.012748
2.013752

Lower
95.0%
-0.01629
1.123256

b. The beta estimate from the regression is 1.57. This estimate is similar to the ones from
Hoovers (1.5), MSN Money (1.52), and Zacks (1.52). The Yahoo! Finance (0.50) estimate
still seems very low.
c. Required returns using these beta estimates:
Excel estimate = 5% + 1.57 (13% 5%) = 17.56%
Hoovers estimate = 5% + 1.5 (13% 5%) = 17.0%
MSN Money and Zacks estimate = 5% + 1.52 (13% 5%) = 17.16%
Yahoo! Finance estimate = 5% + 0.50 (13% 5%) = 9.0%
All the required return estimates are very similar except the Yahoo! Estimate.

10-5

Upper
95.0%
0.012748
2.013752