Use data from the Standard & Poor's Market Insight Database at www.mhhe.com/edumarketinsight to answer the following questions.

1. In the previous chapter you used four years' data from Market Insight to calculate the beta of Alcoa. Now 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 use 4-week T-bill rates to calculate excess returns from the Federal Reserve website at www.federalreserve.gov/releases/h15/data.htm). Now repeat the process using the last two years of monthly data. This will give you the alpha (intercept) and beta (slope) estimates for two consecutive time periods. How do the two alphas compare to the risk-free rate and to each other? Select 11 other firms and repeat the regressions to find the alphas for the first two-year period and the last two-year period.
2. Given your results for question 1, 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 (Y) against the beta in the first period (X). (If you estimated regressions for a dozen firms in question 1, you will have 12 observations in this regression.) Do the same for the alphas of each firm. Use the coefficients you found to forecast the betas of the 12 firms for the next two-year period.
3. Our expectation 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?
4. From Market Insight, 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. 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:
1. Which of the stocks would you classify as defensive? Which would be classified as aggressive?
2. Do the beta coefficients for the low-beta firms make sense given the industries in which these firms operate? Briefly explain.
3. Describe the variations in the reported beta coefficients over the seven months of data. (Check the "% change" worksheet to see the percentage changes.) Which firm has experienced the largest changes from month to month?
5. From Market Insight, enter the ticker symbol ALL for Allstate Corp. In the S&P Stock Reports section open the Wall Street Consensus Report. What is the Wall Street Consensus Opinion for Allstate? How do the analysts' expectations for earnings compare to the firm's performance to date this year? Now open the Industry Outlook Report. What other firms are in Allstate's peer group? What are the firms' beta coefficients? Why might the betas vary among firms? Repeat the process for Monsanto (MON) and the firms in its peer group. Is there more or less variation among the betas in this industry relative to Allstate and its peers?