ESSENTIALS OF INVESTMENTS SELECT CHAPT
ESSENTIALS OF INVESTMENTS SELECT CHAPT
17th Edition
ISBN: 9781307126228
Author: Bodie
Publisher: MCG/CREATE
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Chapter 6, Problem 1WM
Summary Introduction

To determine: In this problem, by using the ticker symbol given, the five year data of monthly adjusted stock prices can be downloaded. After that returns can be calculated and returns data of respective company can be plotted on xy scatter plot against the data of S&P. Then by following the steps mentioned in the questions trend line can be made. Slope of the trend line will be beta of the stock.

Expert Solution & Answer
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Explanation of Solution

First we have to down load the data of Eli Lilly (LLY) for the period between Jan 2014 and Nov 2018 (Five years). Then the returns can be calculated by using this formula:

  Returns=LN(CurrentPricePrevious​​ Price)

Where LN is natural logarithm

Now this is the calculated data here under for Eli Lily. Similarly S&P Data can be obtained and Returns can be calculated as mentioned above.

    LLY Company S&P 500
    Date Adj Close Return LLY Date Adj Close Return S&P
    12/1/2013 null 0 12/1/2013 null 0
    1/1/2014 46.83643 0 1/1/2014 1782.59 0
    2/1/2014 51.692627 0.0986538 2/1/2014 1859.45 0.04221337
    3/1/2014 51.505238 -0.003632 3/1/2014 1872.34 0.00690825
    4/1/2014 51.715252 0.0040692 4/1/2014 1883.95 0.00618164
    5/1/2014 52.380283 0.0127775 5/1/2014 1923.57 0.0208122
    6/1/2014 54.853989 0.0461447 6/1/2014 1960.23 0.018879
    7/1/2014 53.874619 -0.018015 7/1/2014 1930.67 -0.0151947
    8/1/2014 56.08041 0.0401271 8/1/2014 2003.37 0.03696364
    9/1/2014 57.679146 0.0281091 9/1/2014 1972.29 -0.0156354
    10/1/2014 58.995499 0.0225655 10/1/2014 2018.05 0.0229364
    11/1/2014 60.587559 0.0266284 11/1/2014 2067.56 0.02423747
    12/1/2014 61.807735 0.0199389 12/1/2014 2058.9 -0.0041974
    1/1/2015 64.504379 0.0427046 1/1/2015 1994.99 -0.0315328
    2/1/2015 62.864899 -0.025745 2/1/2015 2104.5 0.05343888
    3/1/2015 65.551598 0.0418496 3/1/2015 2067.89 -0.0175492
    4/1/2015 64.847809 -0.010794 4/1/2015 2085.51 0.00848472
    5/1/2015 71.190941 0.0933225 5/1/2015 2107.39 0.01043673
    6/1/2015 75.853432 0.0634374 6/1/2015 2063.11 -0.0212356
    7/1/2015 76.780136 0.012143 7/1/2015 2103.84 0.01954968
    8/1/2015 74.817703 -0.025891 8/1/2015 1972.18 -0.0646247
    9/1/2015 76.492958 0.0221442 9/1/2015 1920.03 -0.0267987
    10/1/2015 74.555267 -0.025658 10/1/2015 2079.36 0.07971938
    11/1/2015 74.984871 0.0057457 11/1/2015 2080.41 0.00050474
    12/1/2015 77.502235 0.0330204 12/1/2015 2043.94 -0.0176857
    1/1/2016 72.756081 -0.063194 1/1/2016 1940.24 -0.0520676
    2/1/2016 66.22551 -0.094047 2/1/2016 1932.23 -0.0041369
    3/1/2016 66.695992 0.0070791 3/1/2016 2059.74 0.06390499
    4/1/2016 69.95623 0.0477249 4/1/2016 2065.3 0.00269576
    5/1/2016 69.493126 -0.006642 5/1/2016 2096.95 0.01520837
    6/1/2016 73.425682 0.0550459 6/1/2016 2098.86 0.00091051
    7/1/2016 77.285789 0.0512363 7/1/2016 2173.6 0.03499043
    8/1/2016 72.493301 -0.064016 8/1/2016 2170.95 -0.00122
    9/1/2016 75.310425 0.0381244 9/1/2016 2168.27 -0.0012352
    10/1/2016 69.286331 -0.083371 10/1/2016 2126.15 -0.0196168
    11/1/2016 62.980747 -0.095419 11/1/2016 2198.81 0.03360355
    12/1/2016 69.921356 0.104542 12/1/2016 2238.83 0.01803711
    1/1/2017 73.229668 0.0462295 1/1/2017 2278.87 0.01772631
    2/1/2017 78.724503 0.0723538 2/1/2017 2363.64 0.036523
    3/1/2017 80.498466 0.0222837 3/1/2017 2362.72 -0.0003893
    4/1/2017 78.536491 -0.024675 4/1/2017 2384.2 0.00905013
    5/1/2017 76.153404 -0.030814 5/1/2017 2411.8 0.01150976
    6/1/2017 79.274796 0.0401705 6/1/2017 2423.41 0.00480223
    7/1/2017 79.621574 0.0043648 7/1/2017 2470.3 0.01916402
    8/1/2017 78.301926 -0.016713 8/1/2017 2471.65 0.00054628
    9/1/2017 82.921219 0.0573188 9/1/2017 2519.36 0.01911904
    10/1/2017 79.431435 -0.042997 10/1/2017 2575.26 0.02194556
    11/1/2017 82.048775 0.0324197 11/1/2017 2584.84 0.00371314
    12/1/2017 82.39135 0.0041666 12/1/2017 2673.61 0.03376601
    1/1/2018 79.45507 -0.036289 1/1/2018 2823.81 0.0546574
    2/1/2018 75.133568 -0.055924 2/1/2018 2713.83 -0.0397261
    3/1/2018 76.036209 0.0119422 3/1/2018 2640.87 -0.0272525
    4/1/2018 79.672424 0.0467139 4/1/2018 2648.05 0.00271509
    5/1/2018 83.573997 0.0478089 5/1/2018 2705.27 0.02137819
    6/1/2018 84.436729 0.0102701 6/1/2018 2718.37 0.00483075
    7/1/2018 97.77562 0.1466728 7/1/2018 2816.29 0.03538795
    8/1/2018 104.544014 0.0669329 8/1/2018 2901.52 0.02981431
    9/1/2018 106.772926 0.0210962 9/1/2018 2913.98 0.00428509
    10/1/2018 107.89727 0.0104752 10/1/2018 2711.74 -0.0719293
    11/1/2018 118.046219 0.0898967 11/1/2018 2760.17 0.01770175
    12/1/2018 115.839996 -0.018866 12/1/2018 2695.95 -0.0235416
    12/6/2018 115.839996 0 12/6/2018 2695.95 0

Now scatter plot between return of Eli Lilly and S&P 500 can be made like this:

  ESSENTIALS OF INVESTMENTS SELECT CHAPT, Chapter 6, Problem 1WM , additional homework tip 1

The trend line can also be obtained by clicking on any blue point and following the steps. This trend line shows that the slope is -0.0004. This slope is beta of Stock Eli Lilly.

Similarly data can be obtained for the next firm AA and returns can be calculated.

    AA Company S&P 500
    Date Adj Close Return AA Date Adj Close Return S&P
    12/1/2013 null 0 12/1/2013 null 0
    1/1/2014 26.76451 0 1/1/2014 1782.59 0
    2/1/2014 27.29933 0.019786 2/1/2014 1859.45 0.04221337
    3/1/2014 30.00557 0.094521 3/1/2014 1872.34 0.00690825
    4/1/2014 31.40442 0.045566 4/1/2014 1883.95 0.00618164
    5/1/2014 31.73083 0.01034 5/1/2014 1923.57 0.0208122
    6/1/2014 34.79342 0.09214 6/1/2014 1960.23 0.018879
    7/1/2014 38.29848 0.095982 7/1/2014 1930.67 -0.0151947
    8/1/2014 38.81255 0.013333 8/1/2014 2003.37 0.03696364
    9/1/2014 37.6662 -0.02998 9/1/2014 1972.29 -0.0156354
    10/1/2014 39.23465 0.040797 10/1/2014 2018.05 0.0229364
    11/1/2014 40.47537 0.031133 11/1/2014 2067.56 0.02423747
    12/1/2014 37.031 -0.08894 12/1/2014 2058.9 -0.0041974
    1/1/2015 36.70266 -0.00891 1/1/2015 1994.99 -0.0315328
    2/1/2015 34.68578 -0.05652 2/1/2015 2104.5 0.05343888
    3/1/2015 30.35504 -0.13337 3/1/2015 2067.89 -0.0175492
    4/1/2015 31.52978 0.03797 4/1/2015 2085.51 0.00848472
    5/1/2015 29.36827 -0.07102 5/1/2015 2107.39 0.01043673
    6/1/2015 26.25399 -0.1121 6/1/2015 2063.11 -0.0212356
    7/1/2015 23.24008 -0.12194 7/1/2015 2103.84 0.01954968
    8/1/2015 22.25113 -0.04349 8/1/2015 1972.18 -0.0646247
    9/1/2015 22.81595 0.025067 9/1/2015 1920.03 -0.0267987
    10/1/2015 21.09177 -0.07858 10/1/2015 2079.36 0.07971938
    11/1/2015 22.10739 0.047029 11/1/2015 2080.41 0.00050474
    12/1/2015 23.38675 0.056258 12/1/2015 2043.94 -0.0176857
    1/1/2016 17.2735 -0.303 1/1/2016 1940.24 -0.0520676
    2/1/2016 21.15944 0.202913 2/1/2016 1932.23 -0.0041369
    3/1/2016 22.79773 0.074575 3/1/2016 2059.74 0.06390499
    4/1/2016 26.58148 0.153554 4/1/2016 2065.3 0.00269576
    5/1/2016 22.06001 -0.18645 5/1/2016 2096.95 0.01520837
    6/1/2016 22.12414 0.002903 6/1/2016 2098.86 0.00091051
    7/1/2016 25.3461 0.135956 7/1/2016 2173.6 0.03499043
    8/1/2016 24.05732 -0.05219 8/1/2016 2170.95 -0.00122
    9/1/2016 24.27107 0.008846 9/1/2016 2168.27 -0.0012352
    10/1/2016 21.3561 -0.12795 10/1/2016 2126.15 -0.0196168
    11/1/2016 28.85664 0.301002 11/1/2016 2198.81 0.03360355
    12/1/2016 28.08 -0.02728 12/1/2016 2238.83 0.01803711
    1/1/2017 36.45 0.260884 1/1/2017 2278.87 0.01772631
    2/1/2017 34.59 -0.05238 2/1/2017 2363.64 0.036523
    3/1/2017 34.4 -0.00551 3/1/2017 2362.72 -0.0003893
    4/1/2017 33.73 -0.01967 4/1/2017 2384.2 0.00905013
    5/1/2017 32.94 -0.0237 5/1/2017 2411.8 0.01150976
    6/1/2017 32.65 -0.00884 6/1/2017 2423.41 0.00480223
    7/1/2017 36.4 0.108724 7/1/2017 2470.3 0.01916402
    8/1/2017 43.88 0.18689 8/1/2017 2471.65 0.00054628
    9/1/2017 46.62 0.060571 9/1/2017 2519.36 0.01911904
    10/1/2017 47.78 0.024578 10/1/2017 2575.26 0.02194556
    11/1/2017 41.51 -0.14067 11/1/2017 2584.84 0.00371314
    12/1/2017 53.87 0.260639 12/1/2017 2673.61 0.03376601
    1/1/2018 52.02 -0.03495 1/1/2018 2823.81 0.0546574
    2/1/2018 44.97 -0.14563 2/1/2018 2713.83 -0.0397261
    3/1/2018 44.96 -0.00022 3/1/2018 2640.87 -0.0272525
    4/1/2018 51.2 0.129966 4/1/2018 2648.05 0.00271509
    5/1/2018 48.07 -0.06308 5/1/2018 2705.27 0.02137819
    6/1/2018 46.88 -0.02507 6/1/2018 2718.37 0.00483075
    7/1/2018 43.27 -0.08013 7/1/2018 2816.29 0.03538795
    8/1/2018 44.67 0.031843 8/1/2018 2901.52 0.02981431
    9/1/2018 40.4 -0.10047 9/1/2018 2913.98 0.00428509
    10/1/2018 34.99 -0.14377 10/1/2018 2711.74 -0.0719293
    11/1/2018 31.81 -0.09528 11/1/2018 2760.17 0.01770175
    12/1/2018 29.65 -0.07032 12/1/2018 2695.95 -0.0235416
    12/6/2018 29.65 0 12/6/2018 2695.95 0

Then we can again prepare scatter plot between returns of AA and S&P like mentioned below.

Scatter Plot can be made by using MS Excel plot function by selecting Returns of LLY and S&P.4

The scatter plot will look like this.

Also then we can insert regression equation. The regression equation will look like this:

Y = 6E-05x + 0.0126

  ESSENTIALS OF INVESTMENTS SELECT CHAPT, Chapter 6, Problem 1WM , additional homework tip 2t

Now from the trend line we have the slope of trend line that shows that beta of stock AA is -0.00006.

Conclusion

The result shows that Eli Lilly has a negative beta and AA has positive beta. Eli Lilly's negative beta is useful to diversify the portfolio in which this stock would be added, for the reason that this stock's returns are negatively correlated with market returns and thus increasing diversification, lowering risk at the cost of less expected returns.

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Chapter 6 Solutions

ESSENTIALS OF INVESTMENTS SELECT CHAPT

Ch. 6 - Prob. 1PSCh. 6 - When adding a risky asset to a portfolio of many...Ch. 6 - A portfolio’s expected return is 12%, its standard...Ch. 6 - An investor ponders various allocations to the...Ch. 6 - The standard deviation of the market-index...Ch. 6 - Suppose that the returns on the stock fund...Ch. 6 - Use the rate-of-return data for the stock and bond...Ch. 6 - Prob. 8PSCh. 6 - Prob. 9PSCh. 6 - Prob. 10PS
Ch. 6 - Prob. 11PSCh. 6 - Prob. 12PSCh. 6 - Prob. 13PSCh. 6 - Suppose that many stocks are traded in the market...Ch. 6 - You can find a spreadsheet containing annual...Ch. 6 - Assume expected returns and standard deviations...Ch. 6 - Prob. 17PSCh. 6 - Prob. 18PSCh. 6 - A project has a 0.7 chance of doubling your...Ch. 6 - Investors expect the market rate of return this...Ch. 6 - The following figure shows plots of monthly rates...Ch. 6 - Prob. 22PSCh. 6 - Prob. 23PSCh. 6 - Prob. 25CCh. 6 - Prob. 1CPCh. 6 - Prob. 2CPCh. 6 - Abigail Grace has a $900,000 fully diversified...Ch. 6 - Prob. 4CPCh. 6 - Prob. 5CPCh. 6 - Prob. 6CPCh. 6 - Prob. 7CPCh. 6 - Prob. 1WMCh. 6 - Following the procedures in the previous question,...Ch. 6 - Prob. 3WMCh. 6 - Prob. 4WM
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Dividend disocunt model (DDM); Author: Edspira;https://www.youtube.com/watch?v=TlH3_iOHX3s;License: Standard YouTube License, CC-BY