Finance 460 ps1

Rick Politician July 22, 2004 Finance 460 - Project #1 3. Paccar appears to be the most volatile on the graph due to the large amount of drastic price changes exhibited as spikes on the graph. I used each firm's beta to estimate the volatility of their stock prices. Since S&P500 is a well diversified stock index, I thought its Beta would be zero, or near zero, and thus have the lowest volatility. Cascade Bancorp has a beta of -0.059, which lends me to believe their stock, on average will vary slightly inversely from the market average. With Paccar's beta of 1.135, I expected them to have the most variability in stock price since January of 1995. Thus, the results were consistent with my expectations. (Beta's were recorded off of Yahoo Finance, 7/15/2004) 7. Cascade Bancorp vs Paccar - The Cascade and Paccar lines roughly seem to follow an imaginary line. The line for each stock appears to move up and down, with small changes and large changes and no direct observable relation to the other stock. One cannot observe the inverse correlation from this graph. Paccar does appear to have slightly larger monthly changes on average than Cascade, inferring the higher Beta. Cascade Bancorp vs S&P500 - Sometimes the Cascade line correlates with the changes in the S&P500, and sometimes Cascade moves inversely in comparison to the S&P500. The Cascade line spikes over a +/- 10% change around 30 times, while the S&P500 only does around 3 times. This leads one to believe the Cascade stock price is more volatile. Paccar vs S&P500 - The Paccar line follows the S&P500 line better than Cascade, although does not resembles perfect correlation. The Paccar line not only follows the S&P500 trends, but amplifies the monthly increases or decreases in returns. This graph shows that Paccar is most likely correlated with the S&P500 and has a higher variability. 10. Things I have learned from the investment opportunity sets: a. The higher the risk(standard deviation), the higher the potential gains or losses on a portfolio b. For the same expected return, the closer the correlation between the individual stocks is to equaling -1, the risk or standard deviation of the portfolio is reduced. Thus the best way to reduce the risk of an investment is to diversify using individual investments that have negative correlations with each other. c. On any of the investment opportunity sets, all points below the minimum variance point are inferior to points above the mpv. (Same E[r], with less risk)