What is the risk profile of your company? (How much overall risk is there in this firm? Where is this risk coming from [market, firm, industry, or currency]? How is the risk profile changing?) What is the performance profile of an investment in this company? What return would you have earned investing in this company’s stock? Would you have under or performed the market? How much of the performance can be attributed to management? How risky is this company’s equity? Why? What is its cost of equity? How risky is this company’s debt? What is its cost of debt? What is the mix of debt and equity used by this firm to fund its investments? What is this company’s current cost of capital?
1. Estimating Historical Risk Parameters (Top-Down Betas)
Run a regression of returns on your firm’s stock against returns on a market index, preferably using monthly data and five years of observations.
Adjusted R Square
What is the intercept of the regression? What does it tell you about the performance of this company’s stock during the period of the regression? The intercept is 0.0113. Since I calculate the excess return of Boeing and S&P 500 (the return of Boeing minus Rf, the return of S&P500 minus Rf), I compare the intercept with 0. The intercept suggest that Boeing’s stock performed 1.13% better than expected. What is the slope of the regression?
-What does it tell you about the risk of the stock?
The slope of the regression is beta. Beta is a measure of the systematic risk. The slope is greater than 1. When the market change 1%, the stock of Boeing will change 1.08% -How precise is this estimate of risk? (Provide a range for the estimate.) The standard error is 0.0523.
The range is 1.019-1.123
What portion of this firm’s risk can be attributed to market factors? What portion to firm-specific...
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