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As of early September 2010 Wal-Mart's WMT beta is 0.33 and Target Stores TGT beta is 1.02. Discuss the meaning of these two betas analytically by briefly setting forth the process for

As of early September 2010, Wal-Mart's (WMT) beta is 0.33 and Target Stores (TGT) beta is 1.02. Discuss the meaning of these two betas, analytically, by briefly setting forth the process for calculating beta and the inputs to the calculations where beta is the output, i.e., the slope of the characteristic line. Be guided by the diagram below: the line shown is called the characteristic line. HINT: What makes the two betas different? 201 18 16 14 Secur tete line Maet 12 etam Sharpe Capital Asset Pricing Model 10 RETURN ON COMPANY SHARE skope of the Ine is Beta coefcent Risktee rate RETURN ON MARKET NDEX market porttolo Beta 1 naket portlolo intercept = 0 25 05 OLS Regression - Characteristic Line Beta 5. The risk free-rate as of early September 2010 was the yield on a 10-year Treasury bond, 2.8%. Assuming that the long-term historical rate of return (and the expectation for the future as well) on the S&P 500 Index is 9%, apply the CAPM equation and calculate the expected rate of return for Wal-Mart and Target Stores stock, using the betas in Question 4 above. What do the results your calculations tell you? 6. Explain why the beta of the S&P 500 Index is 1.0. HINT: Look at the characteristic line diagram on pages 4 and imagine that the same S&P 500 Index data was on both the x- axis and the y-axis. Where would the characteristic line fall in that case?

Aug 15 2020 View more View Less

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