Regression Results
Discussing Stock Risk
Here, we have used Beta as a measure of stock risk arising from general market movements. The above results indicate that on the basis of 2 year monthly returns, the beta of Coca-Cola is 0.92. This indicates the stock returns are marginally less volatile than the market/less than perfectly correlated to the market return as the beta multiple is less than 1.
In addition, we also witness the R-Square multiple of 0.31. This indicates that of the total risk embedded in the Coca-Cola Stock, 31% is the market risk while the remaining risk is diversifiable or unsystematic risk.
R-Square= (Market Risk/ Total Risk)
Part 2:
Comparing returns calculated using CAPM and Constant Growth Model:
Capital Asset Pricing Method(CAPM) is the most celebrated financial model in the industry where the expected return for a stock is calculated using the following formula:
Expected Return= Risk Free Rate+ Beta(Market Return- RFR)
Here;
RFR= 10 Year US treasury Bill Rate
Beta= Stock sensitivity to the market returns
Market Return= Average return of Market Index over an assumed time period
On the other hand, Constant Growth Model assumes a constant growth multiple for the company. Important to note that while the CAPM inputs can be easily calculated using regression analysis, Constant Growth Model is based completely on assumptions
Works Cited
Beta. (n.d.). Retrieved November 3, 2014, from Investopedia: http://www.investopedia.com/terms/b/beta.asp
Coca-Cola Historical Prices. (n.d.). Retrieved November 3, 2014, from Yahoo Finance: https://in.finance.yahoo.com/q/hp?s=%5EGSPC&a=10&b=2&c=2012&d=10&e=3&f=2014&g=m
