In the previous chapter you used data from Market Insight to calculate the beta of Adobe Systems, Inc. (ADBE). Now let's compute the alpha of the stock in two consecutive periods. Estimate the index model regression using the first two years of monthly data. (You can get monthly T-bill rates to calculate excess returns from the Federal Reserve Web site at www.federalreserve.gov/releases/h15/data.htm). Now repeat this exercise using the next two years of monthly data. This will give you alpha (intercept) and beta (slope) estimates for two consecutive time periods. Finally, repeat this regression exercise for several (e.g., a dozen) other firms.
Given your results for Problem 1, we can now investigate the extent to which beta in one period predicts beta in future periods and whether alpha in one period predicts alpha in future periods. Regress the beta of each firm in the second period against the beta in the first period. (If you estimated regressions for a dozen firms in Problem 1, you will have 12 observations in this regression.) Do the same for the alphas of each firm.
Our prediction is that beta in the first period predicts beta in the next period, but that alpha in the first period has no power to predict alpha in the next period. (In other words, the regression coefficient on first-period beta will be statistically significant in explaining second-period beta, but the coefficient on alpha will not be.) Why does this prediction make sense? Is it borne out by the data?
Go to www.mhhe.com/edumarketinsight. Enter ticker symbol BMY for Bristol Myers Squibb. In the Excel Analytics section, click on Monthly Valuation Data. The report summarizes seven months of data related to stock market activity and contains several comparison reports to market indexes. Save the BMY data in an Excel spreadsheet. Then repeat the procedure to obtain data for CQB (Chiquita Brands Intl.), GE (General Electric), ET (E-Trade Financial Corp.), and MLP (Maui Land and Pineapple Company). After reviewing the reports, answer the following questions:
Which of the stocks would you classify as defensive? Which would you classify as aggressive?
Do the beta coefficients for the low-beta firms make sense given the industries in which these firms operate? Briefly explain.
Describe the variations in the reported beta coefficients over the seven months of data.
Go to www.mhhe.com/edumarketinsight. Enter the ticker symbol ALL for Allstate Corp. In the S&P Stock Reports section open the Wall Street Consensus Report. What is the S&P Adjusted Consensus Opinion for Allstate? Now open the Industry Outlook Report. What other firms are in the same industry as Allstate? What are the firms' beta coefficients? Repeat the process for Monsanto (MON).
