Your group project will require you to access Wharton Research Data Services (WRDS) to complete your group project. In this project, your group will:
Understand beta and R2 as two important measures used to evaluate the riskiness of a stock
Identify both the lowest and the highest beta stocks by industry, and note each stock’s corresponding R2 value
Understand the difference between market and firm-specific risk
Become familiar with how alpha, beta and R2 are used for analyzing stock performance and risk
Learn how to use historical company returns to estimate beta and compute cost of equity
Gain working knowledge of the CAPM
Learn how to handle data and run regressions in a spreadsheet (Excel or Google Sheets)
Learn to work collaboratively in an online environment
Perform visual and data analysis using visualization tools, and spreadsheets, and perform linear regression analysis on financial data
Read the following PowerPoint slides in the Group Project Folder:
CAPM Equity Valuation
Market and Firm-Specific Risk
Summarize (using your own words) each sector of your group’s choice by first taking a look at the detailed industry sector primer at the following link:
[login to view URL]
You must cite this source and any other outside source using APA format.
For each sector that you examine, you must first Clear All Companies then select ALL ENERGY (or whatever industry sector that you choose) then X-out the box to get back to the visualization tool. You should feel free to use screenshots (print screen) that must be customized to fit in the body of your word document appropriately.
In your analysis of each industry, you must report and interpret the Selected Industry’s average beta, and the Selected Industry’s R2, based on your group’s reading of the materials. Is your Selected Industry’s average beta considered a reliable estimate? Why or Why not?
Provide visual aids of your analysis (i.e. Figure 1, Figure 2, etc.) from your cropped screenshots with arrows or other identifying features. Then your group must identify the name (and Ticker in parenthesis) of each firm in the sector you examining that has the:
Highest alpha, it’s corresponding beta, R2, idiosyncratic volatility, and total volatility.
Lowest alpha, it’s corresponding beta, R2, idiosyncratic volatility, and total volatility.
Highest beta, it’s corresponding alpha, R2, idiosyncratic volatility, and total volatility.
Lowest beta, it’s corresponding alpha, R2, idiosyncratic volatility, and total volatility.
Highest idiosyncratic risk, it’s corresponding alpha, beta, R2, and total volatility.
Lowest idiosyncratic risk, it’s corresponding alpha, beta, R2, and total volatility.
Remember to interpret these results. Use the data from these firms to assist with your industry analysis below. Do any of the firms identified have a negative alpha and a high beta? Which ones? What may be the rationale based on your reading (in your own words)? How do these firms’ exposure to market risk compare to the industry as a whole? Does there exist any overlap among these firms? If so, which firms?