BETA CALCULATION

Tiffany and Co pays out dividend quarterly. The company has an average monthly return of

1.29% over the past three years and has a high standard deviation (SD) of 13.30%. A high SD implies

high range of rate of returns that also leads to higher risk since investors cannot estimate the return with

ease. We can illustrate how risky this stock is by comparing Tiffany and Co. with the market proxy we

chose: the S&P 500. The S&P500 is a good proxy of the market as it consists of hundreds of

companies’ values, Tiffany and Co. included.1 The market has negative rate of return (-0.50%) but with

lower SD (5.67%). Note that investors want an investment with a low risk but high rate of return.

Based on the high – low close graph of Tiffany and Co., there is significant difference noted in

the company’s stock price over the past three years. The graph indicates the stock price at the low and

high points of each month, marking the actual closing prices. The bigger range proves that the

company’s stock price is quite volatile compared to the market. This volatility also means that we

cannot predict what will happen to the stock price accurately.

By looking at the appendix, with an R^2 of 63%, 63% of the variation on returns is explained

by our return in Tiffany and Co. We calculated a 0.02 coefficient of relationship, which means that the

return in market has a weak positive impact to the return in Tiffany and Co.'s stock. In other words, if

the return on market goes up, the return on Tiffany and Co.'s stock will go up as well. The test of

significance (T-test/ T-stat), returned a number of 1.59.which is to test that the coefficient is not zero.

Meanwhile, we received a P-value of 0.12. In economics’ discipline, a value below 10% indicates how

significant a variable is. The higher the T-statistic and the lower the P-value, the more accurate and

reliable our calculation is.2

1“Yahoo Finance, S&P 500 INDEX, RTH (^GSPC)”. (accessed February 16, 2010)http://finance.yahoo.com/q/hp?s=
%5EGSPC&a=11&b=31&c=2006&d=11&e=31&f=2009&g=m

2Davies, Simon. "4 and 5." http://www.simon-davies.org.uk/Interpreting_OLS_Output(cross-sectional).pdf

 The published beta statistic for Tiffany and Co. is 1.873. After many calculations, we

determined our own measure of the beta to be 1.86.Although the difference between the published and

our calculated betas is very small,this small difference may be explained. The published beta is

calculated using the trading information of Tiffany and Co.'s entire stock price history meanwhile the

beta calculations that we produced were based on the data from the last three years (2006-2009) .

We used monthly Treasury-Bill rates from the St. Louis Federal Reserve as the risk free rate

because it is backed by the full faith and credit of the U.S. Government. It is free from unsystematic

risk that comes from the market.

To calculate the expected return, E(x), we use the CAPM method:

CAPM: E[R] = 1.96% + beta(-5.99% - 1.96%)

which derives from: E[R] = R (f) + β [ R(Mp) ]

E[R] = R (f) + β [ R (f) – R (M) ] ;

Where R(f) is risk free rate, β is beta, R(M) is market risk return, and R(Mp) is market risk

premium.

As shown in appendix,one would expect an expected return for investing in Tiffany and Co to

be -12.83% as opposed to the actual observed value of 15.53%.This leads to an abnormal positive

return of 28.36%, a figure that would attract the investors to hold the stocks.

(accessedFebruary 20 2010).

3 “TIF: Key Statistics for Tiffany & Co – Yahoo! Finance” Yahoo! Finance. http://finance.yahoo.com/q/ks?s=TIF
(accessed February 20, 2010).