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Year MSFT IBM S&P500 index ...

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Question

Finance

Year

MSFT

IBM

S&P500 index

2003

13.75%

4.74%

4.36%

2004

8.16%

2.53%

4.06%

2005

1.62%

6.06%

3.13%

2006

-0.74%

-0.75%

-0.75%

2007

-8.20%

-6.44%

-6.27%

2008

4.80%

1.39%

3.96%

2009

3.66%

0.20%

1.26%

2010

5.26%

-0.14%

1.98%

2011

3.44%

6.47%

2.42%

2012

-0.10%

-1.23%

-1.98%

2013

6.94%

-1.86%

0.28%

2014

0.36%

0.78%

0.71%

2015

2.77%

6.01%

5.04%

2016

2.11%

-0.68%

1.11%

2017

2.90%

6.21%

3.60%

2018

15.71%

6.04%

1.81%

2019

6.13%

3.17%

2.08%

2020

-1.02%

-8.13%

-1.50%

Assume that you are given the annual returns data above:

a) Using CAPM, calculate MFSTs and IBMs required returns. Assume RPM= 2% and Rf=0.5%. Based on CAPM results, which asset has the lowest cost of equity (Re)?

b) Calculate the stocks risk premiums for MSFT and IBM.

c) Assume you are in a job interview and they ask you What are the main factors that affect a stocks beta estimation?. State two factors that affect a stocks beta estimation. (1-2 sentences, you do not need to provide any calculations or numerical answers).

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