A TEACHING TOOL FOR COMPUTING STOCK RETURNS, RISK AND BETA

The purpose of this paper is to serve as a guide for students’ use of actual data for risk and return calculations. The study of stock return risk has been of interest to investors and academics for several decades. Early discussion of the mean-variance framework described the rationale for requiring additional expected income as a reward for choosing higher risk investments. The general concept is to evaluate return risk either on a stand-alone basis (commonly using standard deviation or variance) or on a relative basis (calculating a beta value using a market index or calculating multiple securities portfolio risk). This paper presents a description of the procedure for calculating stand-alone risk and the Capital Asset Pricing Model Beta value using stock prices and the SP500 market index. In addition, the risk (beta) stability over time is addressed.