Quantitative Analysis Risk Analysis Report

| March 27, 2015

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Chis Lee, an angel investor, has asked you to provide information about the risk of an investment
in your company. Lee estimates that the return on the S&P 500 next year will be 5%. Lee would
like to know what the expected return for your company will be, with 95% confidence. Since
your company is not publicly traded, Lee has asked you to quantify the riskiness of the
investment using data on monthly stock returns for the closest comparable publicly-traded
company over a 3-year time period. Lee has identified for you the time period and would like
you to identify a comparable publicly-traded company. In addition, Lee currently owns a
portfolio equally divided between two stocks: Boston Beer Company and Raytheon. Lee would
like to know if adding your stock to this portfolio (so that each stock accounts for a third of the
portfolio) increases or decreases the riskiness of the portfolio’s returns relative to the market. In
other words, does it increase or decrease the beta of the portfolio?
Assignment Logistics: You can find your assigned time period in the table below. You should
obtain data on your company’s stock price during this period from Yahoo! Finance.
Your assigned time period is:
S-Z December 2011-December 2014

Assignment Deliverable: Write a report for Lee summarizing the expected return and risk of the
investment in your company. Your report should be a maximum of two pages long, doublespaced.

1. Identify a publicly traded company to use as a comparable for your company.
2. Determine the extent to which the expected return and risk of an investment in your
company can be expected to be similar to or different from the expected return and risk of
an investment in the comparable company.
3. Obtain data using Yahoo! Finance on the stock prices for the time period Lee has asked
you to use.
4. Determine the variance of the comparable company’s monthly stock returns over the time
period, the systematic and idiosyncratic risk, the stock’s beta, and the 95% confidence
interval for the beta. State the expected excess return (and the 95% confidence interval
for this return) for the company, assuming the market excess return is 5%.
5. Calculate the new combined portfolio beta.


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