Identify a sample of two oil companies for a five-year period of your choice. For example, you could try Exxon Mobil Corp (XOM), Shell PLC (RDS-A) or BP PLC (BP). You can use Yahoo! Finance to obtain this data. Calculate monthly and annual rates of return, and annual standard deviations for these stocks. Use arithmetic average to find these values.
Comment on these returns and standard deviations.
a) Estimate beta and 𝑅2 for each individual company, using Excel functions SLOPE and
RSQ. Comment on these values. Why is the evaluation of stock returns important for investors?
b) Explain what a correlation coefficient is and why it is important. What is the difference between beta and correlation coefficients? Using the Excel function CORREL, calculate the correlation coefficient between the monthly returns of the stocks.
Comment on these values.
c) Using average returns for these stocks, construct an equally weighted portfolio and find its return. Then calculate the portfolio beta and 𝑅2
. Comment on all of these values.
How does the 𝑅2 of this portfolio compare with the average 𝑅2 of the individual stocks? Comment on these values of 𝑅2 and why it is important in risk analyses.