Choose a stock something that is well known and does not really have a lot of debt and it cannot be something from the tobacco industry, banks and financial institutes are also not allowed
The stocks must be non-financial (i.e., banks and other financial institutions are not allowed),
dividend-paying stocks, and they must be covered by the Value Line Investment Survey
(available in the Value Line Research Center database), which covers approximately 1,700
companies.
It is essential that all the companies chosen have paid dividends for the last five years, because
you will be valuing one of these stocks using a dividend discount model in Part 2 of the project.
Keep it simple – choose single-segment firms (those whose business is primarily or exclusively
in one line of business) and avoid conglomerates. Avoid firms with large amounts of debt in
their capital structure.
Along those lines, ensure that data items such as capital spending per share, depreciation, and
working capital are available on the Value Line company report as they will be necessary inputs
for the Equity Valuation Project later on.
Screening tools – within Value Line or other sources available to you at Bentley (e.g. Bloomberg,
FactSet, Morningstar, etc.) – can assist you with stock selection
y, use Bloomberg or FactSet in the Trading Room to obtain monthly closing
stock prices (adjusted for stock splits) for the past 61 months.
Obtain dividends (as of the ex-dividend date) over the past 5 years for each of the stocks.
Using the closing prices and dividends, compute monthly holding period returns (HPRs) for each
stock over the past 60 months. Many sources will provide monthly returns, but you should
calculate them yourself to avoid data errors.
Obtain monthly returns (including dividends) on an appropriate market index for the past 60
months. Your choice of market index should depend on the market capitalization of the stocks
(e.g. S&P 500, Russell 3000).
Obtain monthly yields on 10-year U.S. Treasury Notes over the past 60 months to use for riskfree rates. If your source provides annualized yields, remember to convert them into monthly
values. Bloomberg provides monthly yields for USGG10YR, an index that tracks the 10-year TNote yield.
Download and save a PDF of the most recent Value Line company report for each of your stocks.
Please include the appropriate company name or ticker symbol in each file name.
Security Analysis
For each of the stocks and the market index, compute the arithmetic mean monthly return and the
monthly standard deviation of returns using the Excel functions AVERAGE() and STDEV.P().
Calculate monthly excess returns for each of the stocks and the market index, using the monthly
yields on the 10-year T-Notes as your proxy for the risk-free rate.
Form a correlation matrix as well as a variance-covariance matrix on the excess returns. You
should include the excess market return in the matrix, meaning the dimensions of the matrix will
be 5×5 (4 stocks plus the market index). You can construct the matrices using the Excel functions
CORREL(), COVARIANCE.P(), and VAR.P() (or using the Correlation and Covariance analyses
in Excel’s Data Analysis Toolpack add-in).
Calculate betas for each of the stocks directly using the variance-covariance matrix and use these
values to calculate the corresponding alphas.
Calculate betas for each of the stocks using the Excel function SLOPE().
Calculate monthly alphas for each of the stocks using the Excel function INTERCEPT().
Compare the betas you estimated to the betas listed on the Value Line company reports for your
stocks. Do any of your results match the Value Line beta? What factors might explain any
differences? What data and frequency does Value Line use to calculate beta?
