FRL 4401 WRDS Classroom Project
Beta Visualization Module
Understanding statistical measures of risk is fundamental to understanding investing. In particular, a stock’s CAPM beta coefficient (β) and value are two important risk measures. Beta measures the degree to which stock and benchmark returns move together, while the coefficient of determination, or , represents the strength of the relationship between the stock and the benchmark. The Beta Visualization application provides a rich graphical interface to help visualize and interpret the relationship between the CAPM beta coefficient and
Access the Beta Visualization tool using the following URL: https://wrds-classroom.wharton.upenn.edu/betas/
- Choose Information Technology industry and answer the following:
- locate the highest and lowest beta stocks in the Information Technology industry
- find the corresponding R2 values for the highest and lowest beta stock.
- Locate the industries with the highest and lowest average industry beta
- Locate the industry with an average industry beta closest to the market beta
- Find the Beta and R2 of Apple INC, what percent of Apple’s return can be explained by the return of the benchmark? Is Apple’s return more volatile or less volatile than the market return? How much more or less volatile?
CAPM Equity Valuation Module
In this exercise, you are tasked with downloading historical returns of Microsoft to estimate its beta, then asked to compute the cost of equity using the Capital Asset Pricing Model (CAPM). Click the Link to Platform button or use the following link to retrieve the historical return of Microsoft from 2012 to 2017: https://wrds-classroom.wharton.upenn.edu/stock-returns/
- Using S&P return as the market return, calculate the five-year monthly regression Beta of Microsoft.
- Calculate the Jensen’s alpha of Microsoft.
- During 2012-2017, what percentage of Microsoft’s excess returns can be attributed to the market portfolio returns?
Click the Link to Platform button or use the following link to retrieve the historical return of Vanguard Information Technology ETF (VGT VIS) returns from 2012 to 2017: https://wrds-classroom.wharton.upenn.edu/etf-and-factor-returns/
- Using S&P return as the market return, calculate the five-year monthly regression Beta of VGT VIS.
- Calculate the Jensen’s alpha of VGT VIS.
- During 2012-2017, what percentage of VGT VIS’ excess returns can be attributed to the market portfolio returns?
Financial Ratios Visualization Module
The Financial Ratios Visualization Tool is an application that helps you envision over 70 different financial ratios for easy comparison. The bar graph provides a visual display for comparing financial ratios between individual companies, as well as to the median for each industry sector. For ease of use, the financial ratios are grouped by category according to what is being measured. Click the Link to Platform button or use the following link to retrieve financial ratios: https://wrds-classroom.wharton.upenn.edu/financial-ratios/. Answer the following questions:
- What are the different categories of financial ratios? What does each category of ratio measure?
- Which industry has the highest average dividend payout ratio?
- Which industry has the lowest average ROE?
- Which industry has the lowest average net profit margin?
- Excluding the Financial Industry, which industry has the lowest average asset turnover?
- Excluding the Financial Industry, which industry has the lowest financial leverage?
Three Levers of Performance Module
In this module, you will learn how managers can use three levers to increase ROE:
- The Profit Margin: earnings out of every sale. It involves working on the company’s income statement by trying to squeeze out as much profit out of the sales.
- The Asset Turnover: the sales generated out of the assets invested in the company. As a manager, it involves working on the assets side of the balance sheet to make sure that the assets employed are delivering as much sales.
- The Financial Leverage: the amount of equity needed to finance the assets. Managers can work on the liability side of the balance sheet to tune the amount of equity required to finance all the assets.
Using the Financial Statement web query, download and report basic financial ratios for Adobe (ADBE); General Motors (GM); Hewlett-Packard (HPQ); Google (GOOG); and Southwest Airlines (LUV) from 1990-2015: https://wrds-classroom.wharton.upenn.edu/financial-statements/. Download results in Excel. Compute ratios every 5 years to see trends: 1990; 1995; 2000; 2005; 2010; 2015. Look into the variation of the three components and answer the following questions:
- Did financial performance change due to an increase in the Profit Margin or in Leverage?
- Which determinants of ROE are more difficult to improve from a managers’ perspective?
- How can companies increase Asset Turnover? Give examples in the retail industry.
- Interpret the differences in three levers: identify real changes in the businesses that would reflect a change in the ratios.
- What type of companies display higher levels of leverage?