Excel-Based Return, Portfolio Risk, and Stock Beta Analysis

All flashcards

Monthly price return

The current month-end price minus the previous month-end price, divided by the previous month-end price.

Weighted portfolio return

The sum of each holding’s return multiplied by its portfolio weight.

Beta

The slope relating a stock’s returns to market returns in a linear relationship.

Systematic risk

Risk associated with broad market movements that diversification cannot eliminate.

Excel trendline equation

For a stock-versus-market return plot, the coefficient of the market-return variable is the estimated beta.

Quiz questions

1. In a linear regression of a stock’s returns on market returns, what does the slope estimate?Answer: The stock’s beta, or sensitivity to market returns.
2. When plotting monthly market and stock returns to estimate beta, which returns belong together as one observation?Answer: The market and stock returns from the same month.
3. For the fitted equation $y=1.1477x+0.0186$, where $x$ is market return and $y$ is stock return, what does 0.0186 represent?Answer: The estimated stock return when the market return is zero.
4. A stock has an estimated beta above 1. What does this indicate about its historical market sensitivity?Answer: It has tended to be more sensitive to market movements than a beta-1 stock.
5. What is a limitation of interpreting a beta estimated from historical returns?Answer: It describes a past relationship and does not guarantee future behavior.