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Exercise

Compute dynamic stock Beta

Suppose Elon Musk is your idol and you are considering investing in some Tesla stocks. As a shrewd portfolio manager, you decide to do due diligence by checking Tesla stock Beta over the years. Beta is a measure of a stock's volatility in relation to the market, which can serve as a gauge of investment risks.

Recall you need the stock volatility, market (S&P 500 as a proxy) volatility and their return correlation to compute Beta. Correlation can be computed from standardized residuals.

Model fitted volatility has been preloaded for Tesla in teslaGarch_vol, and for S&P 500 in spGarch_vol. In addition, model standardized residuals are preloaded in teslaGarch_resid and spGarch_resid respectively.

Instructions

100 XP

  • Compute the correlation coefficient between Tesla and S&P 500 using standardized residuals from fitted GARCH models (teslaGarch_resid, spGarch_resid).

  • Compute Tesla stock Beta using Tesla volatility (teslaGarch_vol), S&P 500 volatility (spGarch_vol) and correlation computed from the previous step.