Marvin Brown is a savvy investor who is always looking for a sound company to include in his portfolio of stocks and bonds. Being somewhat risk-averse, his main objective is to buy stock in firms that are mature and well-established in their respective industries. WalMart is one of the stocks Marv is currently considering for inclusion in his portfolio.
WalMart has five major areas of business: traditional WalMart discount stores, Supercenters, Sam’s Clubs, neighborhood markets, and international operations. Although WalMart was established over 50 years ago, it continues to achieve growth through expansion.
In order to determine if WalMart is a “good buy,” Marv has to perform several analyses. First, he must calculate the returns on WalMart’s common stock over the past eight quarters as an indicator of how the stock might perform over the next year. He must then calculate the standard deviation of the stock as a proxy for its risk. To aid in his calculation, Marv has gathered the following stock price and dividend data.
Quarterly Stock Prices and Dividend Payments
Date Dividend Amount Closing Stock Price
16-May-07 $ 0.22 $47.60
14-Mar-07 $ 0.22 $46.73
13-Dec-06 $ 0.168 $45.75
16-Aug-06 $ 0.168 $44.14
17-May-06 $ 0.168 $47.64
15-Mar-06 $ 0.168 $46.29
14-Dec-05 $ 0.15 $45.69
17-Aug-05 $ 0.15 $43.76
1. Calculate the returns for each of the seven quarters.
2. Calculate the standard deviation of the returns from question 1.
3. Assume that WalMart has a Beta of 1.2, the risk-free rate of interest (i.e. as proxied by the return on a 3-month treasury bill) is 5.25%, and the return on the market is 12.2% annually (as proxied by the expected return on the Standard & Poor’s 500). Based on CAPM, what is the required rate of return on WalMart’s stock?
4. Using your answer from question 3, if WalMart had an expected return of 14%, would Marv be well advised to purchase the stock? At what minimum expected rate of return would Marv be encouraged to buy the stock?
5. Marv has based his buy decision on quarterly data from the past two years. If the same analysis was performed five years ago or five years from now, do you think Marv might have come to a different conclusion? Discuss the effect that choosing this particular time period might have on Marv’s results.
Explain each answer briefly.
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