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Portfolio Assignment Case Study Analysis

Beta Calculations for Costco Wholesale Corporation and Fiat Chrysler Automobiles

The amount of beta shown in Appendix A is calculated through linear regression analysis, as shown in the following table, where beta is the coefficient. As equations X and y, Costco’s beta from July 1^st 2019to 2020 untilJune 30^th, is 0.6. This means that Costco Wholesale Corporation are a little more sensitive to the market, at this specific time. In contrast, Fiat Chrysler Automobiles has a beta of 1.2, making it more market-sensitive.

Table 1

SUMMARY OUTPUT	COST

Regression Statistics			Y2	=	0.60X	+	0.00051
Multiple R	0.715078
R Square	0.511336		beta	≈	0.6
Adjusted R Square	0.509381
Standard Error	0.012532
Observations	252

ANOVA
	df	SS	MS	F	Significance F
Regression	1	0.041081	0.041081	261.5989	9.39E-41
Residual	250	0.03926	0.000157
Total	251	0.080341

	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%	Lower 95.0%	Upper 95.0%
Intercept	0.000505	0.00079	0.639249	0.523247	-0.00105	0.00206	-0.00105	0.002059757
SP500 Return	0.604618	0.037382	16.17402	9.39E-41	0.530994	0.678242	0.530994	0.678242076

Table 2

SUMMARY OUTPUT	FCAU

Regression Statistics			Y1	=	1.2X	-	0.00074
Multiple R	0.746046
R Square	0.556585		beta	≈	1.2
Adjusted R Square	0.554811
Standard Error	0.022661
Observations	252

ANOVA
	df	SS	MS	F	Significance F
Regression	1	0.16114	0.16114	313.8061	4.78E-46
Residual	250	0.128376	0.000514
Total	251	0.289516

	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%	Lower 95.0%	Upper 95.0%
Intercept	-0.00074	0.001428	-0.52005	0.60349	-0.00355	0.002069	-0.00355	0.002069443
SP500 Return	1.197457	0.067597	17.71457	4.78E-46	1.064325	1.33059	1.064325	1.330590259

Expected Return for Two-Asset Portfolio with 10% Increments

Capital Asset Pricing Model for Costco Wholesale Corporation

As calculated above, we know that the Beta value for Costco Wholesale Corporationfrom July, 1, 2019 to June 30, 2020 is 0.6. Additionally, the Market Risk Premium value of 7% is provided and the Risk Free Rate has beenconsidered by deducting the inflation rate in 2019, which is 0.09%.

Using the CAPM we can calculate the Expected or Required Rate of Return for the Costco Wholesale Corporationfor the year 2020 which is 0.09 + 0.6 x (7 – 0.09) = 4.322%. Thus, the expected return on investment for the Costco Wholesale Corporationstock during the calendar year of 2020 is 4.322%.

Capital Asset Pricing Model for Fiat Chrysler Automobiles

With a Beta value of 1.2, Market Return of 7% and Risk Free Rate of 0.09%, the Expected Rate of Return for the Fiat Chrysler Automobiles stock in 2020 is: 0.09 + 1.2 x (7 – 0.09) = 8.472%.

Risk of the Portfolio

The daily standard deviation and daily variation of both the stocks, should be calculated using Excel. The daily standard deviation and daily difference for Costco Wholesale Corporationis 1.79% and 0.03%, and the daily standard deviation as well as daily difference for Fiat Chrysler Automobiles is 3.4% and 0.12%, respectively. These calculations are also used in Excel, in order to calculate the standard deviation and the expected return on the portfolio, as shown in the table below. It then uses the annual standard deviation and expected return to plot the efficient frontier curve for the two asset portfolios...............................

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