Universidad de Especialidades Espíritu Santo
Facultad de Estudios Internacionales
STATISTICS I
Final Case Study
Prof. Billy Andrade, MsC.
Case 1 Measuring Stock Market Risk
One measure of the risk or volatility of an individual stock is the standard deviation of the total
return (capital appreciation plus dividends) over several periods of time. Although the standard
deviation is easy to compute, it does not take into account the extent to which the price of a given
stock varies as a function of a standard market index, such as the S&P 500. As a result, many financial
analysts prefer to use another measure of risk referred to as beta.
Betas for individual stocks are determined by simple linear regression. The dependent variable
is the total return for the stock and the independent variable is the total return for the stock market. For
this case problem we will use the S&P 500 index as the measure of the total return for the stock
market, and an estimated regression equation will be developed using monthly data. The beta for the
stock is the slope of the estimated regression equation (b1). The data contained in the file named Beta
provides the total return (capital appreciation plus dividends) over 36 months for eight widely traded
common stocks and the S&P 500.
The value of beta for the stock market will always be 1; thus, stocks that tend to rise and fall
with the stock market will also have a beta close to 1. Betas greater than 1 indicate that the stock is
more volatile than the market, and betas less than 1 indicate that the stock is less volatile than the
market. For instance, if a stock has a beta of 1.4, it is 40% more volatile than the market, and if a stock
has a beta of .4, it is 60% less volatile than the market.
Managerial Report:
You have been assigned to analyze the risk characteristics of these stocks. Prepare a report or
presentation that includes but is not limited to the following items.
1. Compute descriptive statistics for each stock and the S&P 500. Comment on your results.
Which stocks are the most volatile?
Our analysis of the data reveals that several companies outperformed the market (represented by the
S&P 500) in terms of average monthly returns. These high performers include Exxon Mobil,
Caterpillar, McDonald's, Sandisk, Qualcomm, and Procter & Gamble. Conversely, Microsoft and
Johnson & Johnson exhibited lower average monthly returns.
While examining volatility through standard deviation, Sandisk emerged as the most volatile stock. In
contrast, Johnson & Johnson and Procter & Gamble displayed lower volatility than the other individual
stocks. Interestingly, despite the variations within the group, all the individual stocks exhibited greater
volatility than the overall market. This highlights the diversification benefit offered by the S&P 500,
which helps to reduce risk.
Among the analyzed stocks, Sandisk exhibited the greatest swings in its price movements. This is
statistically captured by its standard deviation, which is the highest at 0.195. In simpler terms,
Sandisk's stock price fluctuated more compared to the other companies.
2. Compute the value of beta for each stock. Which of these stocks would you expect to perform
best in an up market? Which would you expect to hold their value best in a down market?
Microsoft:
Beta=0.46. It means that Microsoft is 54% less volatile than the market.
Exxon Mobil:
Beta= 0,73. Meaning that it is 27% less volatile than the market.
Caterpillar:
Beta= 1,49. Meaning that is 49% more volatile than the market.
Johnson & Johnson:
Beta= 0,009. Meaning that it is 99.1% less volatile than the market.
Mc Donalds:
Beta= 1.5. Meaning that it is 50% more volatile than the market.
Qualcomm:
Beta= 1.41. Meaning that it is 41% more volatile than the market.
Sandisk:
Beta= 2.6. Meaning that it is 160% more volatile than the market.
Beta= 1.41. Meaning that it is 41% more volatile than the market.
Procter:
Beta= 0,51. Meaning that it is 49% less volatile than the market.
Beta market as a whole is 1, every stock that has a result greater than 1 is going to move up faster in
the market when the market goes up than the ones that are less than 1. Knowing that, we would expect
Sandisk to benefit more from an up market, since its beta is 2,6. On the other hand Johnson & Johnson
is the least affected stock in the market wi
3. Comment on how much of the return for the individual stocks is explained by the market.
Based on the R-squared values, the market appears to have a limited to moderate influence on the
returns of the individual stocks in our data set. This influence ranges from no effect (0%) to a
maximum of 33.8%. This suggests that other factors beyond overall market movement play a
significant role in the performance of these particular stocks.
The most volatile: Volatility is a statistical measure of dispersion that can be calculated using Standard
Deviation. SANDISK has the highest SD of the companies in the data. So, with a standard deviation of
0.195, SANDISK is the most volatile stock.
