24 MARCH 2015

TUESDAY

Case/Problem Set: Beta Management

Assignment questions:
The underlying question is how much will Ms. Wolfe require/expect to
earn on each stock (given its riskiness) in order to hold it?
1. Calculate the variability (standard deviation) of the stock returns of
California REIT and Brown Group during the past 2 years. How variable
are they compared with Vanguard Index 500 Trust? Which stock
appears to be the riskiest?
2. Suppose Betas position had been 99% of equity funds invested in the
index fund, and 1% in the individual stock. Calculate the variability of
the portfolio using each stock. How does each stock affect the
variability of the equity investment, and which stock is the riskiest?
Explain how this makes sense in view of your answer to Question #1
above.
3. Perform a regression of each stocks monthly returns on the Index
returns to compute the beta for each stock. How does this relate to
the situation described in Question #2 above?
4. How might the expected return for each stock relate to its riskiness?
What future returns should she expect for each stock?
5. How can the CAPM be used to measure a companys cost of equity
capital? What problems do you see in using the CAPM to estimate a
companys cost of equity? Evaluate it against alternative procedures
available.
6. Suppose the CAPM has been used to estimate a companys cost of
equity, and that the company is now considering a change in its capital
structure. Would you expect the cost of equity to change? How could
you estimate the cost of equity for the new capital structure?
IN ADDITION TO THE READINGS IN THE TEXTBOOK, ANOTHER SOURCE OF
INFORMATION IS THE HARVARD BUSINESS SCHOOL NOTE DIVERSIFICATION, THE
CAPITAL ASSET PRICING MODEL, AND THE COST OF EQUITY CAPITAL NOTE # 9276-183 WHICH CAN BE DOWNLOADED IF YOU WISH TO PURCHASE IT FROM
WWW.HARVARDBUSINESSONLINE.HBSP.HARVARD.EDU.

26 MARCH 2015
THURSDAY

Case: Cost of Capital at Ameritrade- Day 1

Assignment Questions:
1.

What factors should Ameritrade management consider when

evaluation the proposed advertising program and technology
upgrades? Why?

2.

How can the Capital Asset Pricing Model be used to estimate the
cost of capital for a real (not financial) investment decision?

3.

What is the estimate of the risk-free rate that should be

employed in calculating the cost of capital for Ameritrade?

4.

What is the estimate of the market risk premium that should be

employed in calculating the cost of capital for Ameritrade?

5.

In principle, what are the steps for computing the asset beta in
the CAPM for purposes of calculating the cost of capital for a project?
31 MARCH 2015
TUESSDAY

Case: Cost of Capital at Ameritrade- Day 2

Assignment Questions:
1.

Ameritrade does not have a beta estimate as the firm has been
publicly traded for only a short time period. Exhibit 4 provides various
choices of comparable firms. What comparable firms do you
recommend as the appropriate benchmarks for evaluating the risk of
Ameritrades planned advertising and technology investments?

2.

Using the stock price and returns data in Exhibits 4 and 5, and
the capital structure information in Exhibit 3, calculate the asset betas
for the comparable firms.

3.

How should Joe Ricketts, the CEO of Ameritrade, interpret and

use the cost of capital estimate you have calculated?