1. Look at the companies listed in Table 8.2. Calculate monthly rates of return for two successive five-year periods. Calculate betas for each subperiod using the Excel SLOPE function. How stable was each company’s beta? Suppose that you had used these betas to estimate expected rates of return from the CAPM. Would your estimates have changed significantly from period to period?
2. I dentify a sample of food companies. For example, you could try Campbell Soup (CPB), General Mills (GIS), Kellogg (K), Kraft Foods (KFT), and Sara Lee (SLE).
a. Estimate beta and R2 for each company, using five years of monthly returns and Excel functions SLOPE and RSQ.
b. Average the returns for each month to give the return on an equally weighted portfolio of the stocks. Then calculate the industry beta using these portfolio returns. How does the R2of thisportfolio compare with the average R2 of the individual stocks?
c. Use the CAPM to calculate an average cost of equity ( requity ) for the food industry. Use current interest rates—take a look at the end of Section 9-2—and a reasonable estimate of the
market risk premium.