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Alcoa

In: Business and Management

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Calculating Beta Value
A corporation’s beta provides investors and market observers a general sense of a stock’s risk profile. Having a beta value of greater than 1 reflects that the volatility in the stock’s price is greater than the broad-based index. While this may be unappealing for risk adverse investors, many companies have a beta greater than 1 and this paper will examine and analyze the strengths and weaknesses of Alcoa’s beta analysis. To calculate Alcoa’s historical beta, we used weekly adjusted stock prices for dividends and splits posted on Yahoo Finance and weekly S&P 500 index value for the same period. The beta calculated using this data was 2.06. As shown on table 1 the correlation with the S&P market is significant, that is also evident if we plot the values together in the same graph, figure 1 shows a positive relationship between the market and Alcoa stock price.
Table [ 1 ]: Regression Output AA and S&P

Similar to other market indicators, it’s crucial to recognize that the economic downturn of 2008, as well as the recent recovery, resulted in Alcoa’s stock price and the broad-based index in general returning numbers that were disproportionately high. In several instances, variations over 5% occurred. Especially when Alcoa rebounded as the market remained flat. A three year analysis provides results which may not be indicative of the actual beta relationship that Alcoa maintains with the index today, therefore, several steps were also taken to obtain a more short term view of Alcoa’s relationship to the market.
Figure 1: Scatter plot AA and S&P500

Calculating Required Rate of Return
Using the Capital Asset Pricing Model (CAPM), we determined an appropriate required rate of return to be 11.47%. To determine the rate of return, a risk-free investment (T-Bond) with a maturity of 30 years and a return of 4.38% was...

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