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We note that Beta of Amazon, J&J and Campbell is more or less stable while beta of other companies has varied
over the 5year sub-periods.
Expected return Er = Krf +beta*MRP
As Expected return is dependent on beta, changes in beta will definitely impact expected returns of the two sub-
periods where beta has changed significantly like in Ford, Newmont and Exxon.
2. Identify a sample of food companies. For example, you could try Campbell Soup (CPB), General Mills (GIS),
Kellogg (K), Kraft Foods (KFT), and Sara Lee (SLE).
a. Estimate beta and R2 for each company, using five years of monthly returns and Excel functions SLOPE and RSQ.
Beta RSQ
2006-2011 2011-16 2006-2011 2011-16 Average Return
Campbell soup 0.30 0.34 0.11 0.05 -0.54%
General Mills 0.24 0.34 0.10 0.11 -0.99%
Kellogg 0.47 0.45 0.26 0.13 -0.54%
b. Average the returns for each month to give the return on an equally weighted portfolio of the stocks. Then calculate
the industry beta using these portfolio returns. How does the R2 of this portfolio compare with the average R2 of the
individual stocks?
Average Portfolio return of equal weight = 0.33*(-0.54%-0.99%-0.54%) = -0.68%
S&P Avge return = -0.33%
So Er = Krf + beta*(Km - Krf)
US Traesury bill rate for 5 Year = 1.13% = Krf
So Er = -0.68% = 1.13% +beta*(-0.33% - 1.13%)
Solving for beta, we get Industry beta = (-0.68%-1.13%)/-1.46% = 1.24
Portfolio R2 (2011-16) = R1B1 + R2B2 + R3B3 = 0.05*0.34 + 0.11*0.34 + 0.13*0.45 = 0.11
So Portfolio R2 0.11 is almost equal to GIS & Kellogg R2.
c. Use the CAPM to calculate an average cost of equity (r equity) for the food industry. Use current interest rates
takea look at the end of Section 92and a reasonable estimate of the market risk premium
Current US Treasury rate for 5Yr is 1.13% = Krf. Market risj\k premium as per pext book is 7%
So Avge cost of equity Es = Krf + beta*(Km-Krf) = 1.13% + 1.24*( 7%-1.13%) = 8.41%