Beta Calculation
Section 3: Beta Calculation
The beta coefficient of a company shows the price volatility in relation to the volatility of the market index. A beta of 1 exemplifies that the company’s price is will move 100% of the movement of the market. The beta essentially demonstrations the risk and return of the company as the market moves.
We chose the S&P 500 index because it is a compilation of the 500 largest publically traded companies in the United States. Also, we wanted to have an index that has a broad variety of stocks in various markets. Since both PC Connection, Inc. and our diversifier, The Allstate Co, are publically traded U.S. companies so we wanted an index that was based in the U.S.
After we ran a regression from the raw data in Appendix 1, our analysis showed that our company’s, PC Connections, Inc. (PCCC), beta coefficient is 0.3136 (Appendix 9). PCCC’s beta isn’t very high and is considerably safer than the movement of the S&P 500. Our calculated beta of 0.3136 was almost exactly the same beta calculated by Yahoo! Finance, which was 0.32 . We used the S&P 500 and a monthly duration of 3 years, or 36 months. Yahoo! Finance also used the same index (S&P500) but their duration is calculated for 5 years . We believe that is the reason why our beta calculations are slightly different from each other
In order to see the explanation of our company’s performance in relation to the S&P 500, we looked at the coefficient of determination, or R^2. R^2 is a scale that goes between 0 and 1 with 1 being 100% of the variance explained by the market index. PC Connection, Inc. has a R^2 of 0.0194, which essentially means that PCCC’s performance variance is explained by only 1.94% of the S&P 500 (Appendix 5). The market does not explain the other 98.06% of variance. The strength of the relationship between PCCC and the S&P 500 not strong due to the market’s inability