Calculating the Required Rate of Return using Bloomberg
Calculate the required rate of return for your stock. To do this, you will use the Capital Asset Pricing Model. You will need several pieces of publicly available information – risk free rate, company’s beta, and the rate of return on a selected stock index.To calculate the required rate of return for your assigned company, follow the instructions below.
- Calculate beta for your company. This process was detailed in class. You can refer back to the posted spreadsheets and lectures.
- Open Yahoo Finance and put in your company’s ticker. Click on Historical Data and get 3 months of stock prices. Download and keep the date and adjusted close price in the Excel file. Go back and do the same thing for the market (use the S&P 500, which has a ticker of ^GSPC). Insert the market adjusted close prices into the same Excel file to the left of your company’s stock prices.
- Next, calculate the daily returns for both your company and the market (create two additional columns for this).
- Highlight these returns and insert a scatter plot into Excel.
- Appropriately label the graph (title, x and y axes).
- Then put in the Characteristic line: Add Chart Element, Trendline – and make sure that “display equation” is checked. You should now have your estimate of beta. Use this for the remainder of the project.
- Find the most recent return on a 10-year Treasury security. You can find this directly from the US Treasury Data site https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield or another source. Be careful about units (percent).
- For the market risk premium, use 5%. This is the recently reported market risk premium as calculated by Damodaran Online (NYU).
- Calculate the required rate of return for your company using the data that you collected. Explain your results and show all calculations. What does this number mean? Does it seem reasonable?
- . Be sure to include a text box to answer all questions (previous bullet).