BWFF2033 FINANCIAL MANAGEMENT

ASSIGNMENT 2

QUESTION 2
1) Go to finance.yahoo.com and download the ending monthly stock prices for Colgate-
Palmolive for the last 60months. Use the adjusted closing price, which adjusts for dividend
payments and stock splits. Next, download the ending value of the S&P 500 index over the same
period. For the historical risk-free rate, go to the St. Louis Federal Reserve website
(www.stlouisfed.org) and find the three-month Treasury bill secondary market rate. Download
this file. What are the monthly returns, average monthly returns, and standard deviations for
Colgate-Palmolive stock, the three-month Treasury bill, and the S&P 500 for this period?

Monthl
y Monthly Monthly
Adj Close
Date Adj Close Return Return Date TB3MS Return
(S&P 500) (TB3MS)
CL (CL) (S&P 500)
4/30/2012 44.268944 1397.910034
5/1/2012 43.982586 -0.01 1310.329956 -0.0626507 4/1/2012 0.08
6/1/2012 46.57769 0.06 1362.160034 0.039555 5/1/2012 0.09 0.125
7/2/2012 48.319962 0.04 1379.319946 0.0125976 6/1/2012 0.09 0
8/1/2012 47.847382 -0.01 1406.579956 0.0197634 7/1/2012 0.10 0.111111
9/4/2012 48.256954 0.01 1440.670044 0.0242362 8/1/2012 0.10 0
10/1/2012 47.506042 -0.02 1412.160034 -0.0197894 9/1/2012 0.11 0.1
11/1/2012 49.108288 0.03 1416.180054 0.0028467 10/1/2012 0.10 -0.090909
12/3/2012 47.315948 -0.04 1426.189941 0.0070682 11/1/2012 0.09 -0.1
1/2/2013 48.874817 0.03 1498.109985 0.0504281 12/1/2012 0.07 -0.222222
2/1/2013 52.088528 0.07 1514.680054 0.0110606 1/1/2013 0.07 0
3/1/2013 53.727245 0.03 1569.189941 0.0359877 2/1/2013 0.10 0.428571
4/1/2013 54.668953 0.02 1597.569946 0.0180858 3/1/2013 0.09 -0.1
5/1/2013 52.961262 -0.03 1630.73999 0.0207628 4/1/2013 0.06 -0.333333
6/3/2013 52.457653 -0.01 1606.280029 -0.0149993 5/1/2013 0.04 -0.333333
7/1/2013 55.138859 0.05 1685.72998 0.0494621 6/1/2013 0.05 0.25
8/1/2013 53.204811 -0.04 1632.969971 -0.031298 7/1/2013 0.04 -0.2
9/3/2013 54.613903 0.03 1681.550049 0.0297495 8/1/2013 0.04 0
10/1/2013 59.936188 0.10 1756.540039 0.0445958 9/1/2013 0.02 -0.5
11/1/2013 60.936199 0.02 1805.810059 0.0280495 10/1/2013 0.05 1.5
12/2/2013 60.380634 -0.01 1848.359985 0.0235628 11/1/2013 0.07 0.4
1/2/2014 56.994709 -0.06 1782.589966 -0.0355829 12/1/2013 0.07 0
2/3/2014 58.484039 0.03 1859.449951 0.043117 1/1/2014 0.04 -0.428571
3/3/2014 60.382935 0.03 1872.339966 0.0069322 2/1/2014 0.05 0.25
4/1/2014 62.982357 0.04 1883.949951 0.0062008 3/1/2014 0.05 0
5/1/2014 64.011787 0.02 1923.569946 0.0210303 4/1/2014 0.03 -0.4
6/2/2014 63.805897 0.00 1960.22998 0.0190583 5/1/2014 0.03 0
7/1/2014 59.640781 -0.07 1930.670044 -0.0150798 6/1/2014 0.04 0.333333
8/1/2014 60.891922 0.02 2003.369995 0.0376553 7/1/2014 0.03 -0.25
9/2/2014 61.352867 0.01 1972.290039 -0.0155138 8/1/2014 0.03 0
 10/1/2014 63.268055 0.03 2018.050049 0.0232015 9/1/2014 0.02 -0.333333
11/3/2014 65.831696 0.04 2067.560059 0.0245336 10/1/2014 0.02 0
12/1/2014 65.4533 -0.01 2058.899902 -0.0041886 11/1/2014 0.02 0
1/2/2015 64.208687 -0.02 1994.98999 -0.0310408 12/1/2014 0.03 0.5
2/2/2015 67.346848 0.05 2104.5 0.0548925 1/1/2015 0.03 0
3/2/2015 65.93943 -0.02 2067.889893 -0.0173961 2/1/2015 0.02 -0.333333
4/1/2015 64.337578 -0.02 2085.51001 0.0085208 3/1/2015 0.03 0.5
5/1/2015 63.869007 -0.01 2107.389893 0.0104914 4/1/2015 0.02 -0.333333
6/1/2015 62.549362 -0.02 2063.110107 -0.0210117 5/1/2015 0.02 0
7/1/2015 65.411827 0.05 2103.840088 0.019742 6/1/2015 0.02 0
8/3/2015 60.401604 -0.08 1972.180054 -0.0625808 7/1/2015 0.03 0.5
9/1/2015 61.026676 0.01 1920.030029 -0.0264428 8/1/2015 0.07 1.333333
10/1/2015 64.169479 0.05 2079.360107 0.0829831 9/1/2015 0.02 -0.714286
11/2/2015 63.521503 -0.01 2080.409912 0.0005049 10/1/2015 0.02 0
12/1/2015 64.430611 0.01 2043.939941 -0.0175302 11/1/2015 0.12 5
1/4/2016 65.710541 0.02 1940.23999 -0.0507353 12/1/2015 0.23 0.916667
2/1/2016 63.871464 -0.03 1932.22998 -0.0041284 1/1/2016 0.26 0.130435
3/1/2016 68.746483 0.08 2059.73999 0.0659911 2/1/2016 0.31 0.192308
4/1/2016 69.386833 0.01 2065.300049 0.0026994 3/1/2016 0.29 -0.064516
5/2/2016 68.887863 -0.01 2096.949951 0.0153246 4/1/2016 0.23 -0.206897
6/1/2016 71.617538 0.04 2098.860107 0.0009109 5/1/2016 0.27 0.173913
7/1/2016 73.203865 0.02 2173.600098 0.0356098 6/1/2016 0.27 0
8/1/2016 73.115341 0.00 2170.949951 -0.0012192 7/1/2016 0.30 0.111111
9/1/2016 72.91864 0.00 2168.27002 -0.0012345 8/1/2016 0.30 0
10/3/2016 70.568283 -0.03 2126.149902 -0.0194257 9/1/2016 0.29 -0.033333
11/1/2016 64.506294 -0.09 2198.810059 0.0341745 10/1/2016 0.33 0.137931
12/1/2016 64.713959 0.00 2238.830078 0.0182008 11/1/2016 0.45 0.363636
1/3/2017 64.232658 -0.01 2278.870117 0.0178844 12/1/2016 0.51 0.133333
2/1/2017 72.587479 0.13 2363.639893 0.0371982 1/1/2017 0.51 0
3/1/2017 72.796349 0.00 2362.719971 -0.0003892 2/1/2017 0.52 0.019608
4/3/2017 73.300003 0.01 2388.77002 0.0110254 3/1/2017 0.74 0.423077

Average monthly Variance Standard deviations

returns
Colgate-Palmolive (CL) 0.01 0.0014883589 0.0385792544
S&P 500 0.0093909528 0.0008449246 0.0290675865
TBTMS 0.1517960485 0.545915084 0.7388606662
2) Beta is often estimated by linear regression. A model commonly used is called the market
model, which is: Rt - Rft = i + betai [Rmt - R ft] + Et In this regression, Rt is the return on
the stock and Rft is the risk-free rate for the same period. RMt is the return on a stock market
index such as the S&P 500 index. i is the regression intercept, and i is the slope (and the
stocks estimated beta). i represents the residuals for the regression. What do you think is the
motivation for this particular regression? The intercept, i, is often called Jensens alpha. What
does it measure? If an asset has a positive Jensens alpha, where would it plot with respect to the
SML? What is the financial interpretation of the residuals in the regression?

ANSWER
The motivation for this regression is to relate the returns from the stock to the
returns from market. This helps in understanding and predicting the stock
returns from the benchmark returns .In a regression, we realize that there is
some indeterminate error, so we need to formally recorgnize this in the
equation by adding epsilon which represents the residuals for the regression i.
Since there is no intercept in the equation, the intercept is zero, we can add
an intercept term which called alpha.
Jensen's alpha is represents the "excess" return. If CAPM holds exactly,
intercept should zero. If a stock has positive jensens alpha, it would plot
above the SML.If a stock has negative jensens alpha, it would plot below the
SML.The residuals are error factors, unexplainable movement in the stock
price due to stock specific issues.

3) Use the market model to estimate the beta for Colgate-Palmolive using the last 36 months of
returns (the regression procedure in Excel is one easy way to do this). Plot the monthly returns
on Colgate-Palmolive against the index and also show the fitted line.

ANSWER
Beta = 0.736127716

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.546966964
R Square 0.29917286
Adjusted R S 0.278560297
Standard Err 0.0341985
Observations 36
ANOVA
df SS MS F Significance F
Regression 1 0.01697 0.0169747863 14.5141029 0.000556649
Residual 34 0.03976 0.0011695374
Total 35 0.05674

Coefficients
Standard Error t Stat P-value Lower 95%
Intercept -0.00018643 0.00586 -0.031812249 0.9748078 -0.01209572
S&P 500 0.736127716 0.19322 3.8097379048 0.00055665 0.343452013
Upper 95%Lower 95.0%Upper 95.0%
Intercept 0.011722868 -0.0121 0.0117228681
S&P 500 1.128803419 0.34345 1.1288034194
RESIDUAL OUTPUT

Observation Predicted Y Residuals

1 0.015294547 0.00105
2 0.013842941 -0.01706
3 -0.01128711 -0.05399
4 0.027532682 -0.00655
5 -0.01160659 0.01918
6 0.016892813 0.01432
7 0.01787343 0.02265
8 -0.00326976 -0.00248
9 -0.02303642 0.00402
10 0.040221474 0.00865
11 -0.01299218 -0.00791
12 0.006085986 -0.03038
13 0.007536572 -0.01482
14 -0.0156537 -0.00501
15 0.01434623 0.03142
16 -0.0462539 -0.03034
17 -0.01965173 0.03
18 0.060899748 -0.0094
19 0.000185223 -0.01028
20 -0.01309088 0.0274
21 -0.0375341 0.0574
22 -0.00322543 -0.02476
23 0.048391463 0.02793
24 0.001800677 0.00751
25 0.011094439 -0.01829
26 0.000484129 0.03914
27 0.026026936 -0.00388
 28 -0.00108394 -0.00013
29 -0.00109514 -0.0016
30 -0.01448621 -0.01775
31 0.024970388 -0.11087
32 0.01321166 -0.00999
33 0.012978747 -0.02042
34 0.027196172 0.10288
35 -0.00047292 0.00335
36 0.007929714 -0.00101
C olgate-Palmolive

BETA FOR COLGATE-PALMOLIVE FOR LAST 36 MONTHLY

0.15

0.10

0.05 - 0.0001864251
f(x) = 0.7361277164x
0.00
-0.08 -0.06 -0.04 -0.02 0 0.02 0.04 0.06 0.08 0.1
-0.05

-0.10
S&P 500 for last 36 monthly

M
 Regression Statistics Beta = 0.7592051932
Multiple R 0.572024082
R Square 0.327211551
Adjusted R Squa 0.31561175
Standard Error 0.03218509
Observations 60

ANOVA
df SS MS F Significance F
Regression 1 0.0292204929 0.0292205 28.2083765825 1.8013616E-06
Residual 58 0.0600810395 0.0010359
Total 59 0.0893015324

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 0.002045325 0.0043665417 0.4684085 0.6412481427 -0.0066952576 0.0107859081 -0.0066952576 0.010785908
X Variable 1 0.759205193 0.1429453801 5.3111559 1.8013616E-06 0.4730689267 1.0453414598 0.4730689267 1.04534146

RESIDUAL OUTPUT

Observation Predicted Y Residuals

1 -0.04551943 0.0390508331
2 0.032075673 0.0269273151 BETA FOR COLGATE-PALMOLIVE FOR LAST 60 MONTHLY
3 0.011609469 0.0257962504
0.15
4 0.017049778 -0.026830001

0.10
live
 BETA FOR COLGATE-PALMOLIVE FOR LAST 60 MONTHLY

0.15

5 0.020445539 -0.0118855722
6 -0.0129789 -0.0025818028 0.10
7 0.004206568 0.0295206371

Colgate-Palmolive
8 0.007411562 -0.0439092714 f(x) = 0.7592051932x + 0.0020453252
0.05
9 0.040330598 -0.007384645
10 0.010442628 0.0553112964
0.00
11 0.029367392 0.0020928368 -0.08 -0.06 -0.04 -0.02 0 0.02 0.04 0.06 0.08 0.1
12 0.015776134 0.001751435
-0.05
13 0.01780856 -0.0490455033
14 -0.00934222 -0.0001667843
15 0.039597193 0.0115146247 -0.10
16 -0.02171629 -0.0133596591 S&P 500 for last 60 monthly
17 0.024631318 0.001852979
18 0.035902652 0.0615502803
19 0.02334063 -0.0066560351
20 0.019934319 -0.0290514777
21 -0.0249694 -0.0311069391
22 0.034779998 -0.0086489762
23 0.007308261 0.025160358
24 0.006752996 0.0362959544
25 0.018011623 -0.001666887
26 0.01651451 -0.0197309485
27 -0.00940336 -0.0558745558
28 0.030633421 -0.0096554765
29 -0.00973286 0.0173027481
30 0.019659995 0.0115559548
31 0.020671353 0.0198489536
32 -0.00113467 -0.0046132578
33 -0.02152102 0.0025057331
34 0.043720005 0.0051543945
35 -0.01116189 -0.0097361635
36 0.008514376 -0.0328071548
37 0.010010437 -0.0172934437
38 -0.01390685 -0.0067548973
39 0.017033577 0.0287297198
40 -0.04546636 -0.0311287059
41 -0.01803021 0.0283788092
42 0.065046539 -0.0135476995
43 0.002428625 -0.0125265093
44 -0.01126368 0.0255754974
45 -0.03647319 0.0563384417
46 -0.00108895 -0.0268986017
47 0.052146122 0.0241793399
48 0.004094723 0.0052199358
49 0.013679843 -0.0208709767
50 0.002736901 0.0368880033
51 0.029080471 -0.0069304916
52 0.001119669 -0.0023289499
53 0.001108124 -0.0037984073
54 -0.01270275 -0.0195298437
55 0.0279908 -0.1138932584
56 0.015863438 -0.0126441401
57 0.015623223 -0.0230605827
58 0.030286362 0.0997848709
59 0.001749845 0.0011276488
60 0.010415903 -0.0034972323
5CompareyourbetaforColgate-Palmolivetothebetayoufindon
finance.yahoo.com.Howsimilararethey?Whymighttheybedifferent?

ANSWER