Tuesday, September 20, 2022

Linear Regression of Monthly Returns of Cisco Systems and the Vanguard S&P 500 Index ETF

Here is the graph of monthly returns of Cisco Systems (CSCO) plotted against Vanguard S&P 500 Index ETF (VOO):

Exhibit 1: Monthly Returns of Cisco Systems and Vanguard S&P 500 Index ETF [June 2019 -  August 2022]

Monthly Returns of the Vanguard S&P 500 Index ETF and Cisco Systems
Monthly Returns of the Vanguard S&P 500 Index ETF and Cisco Systems Inc.

(Source: RStudio, ggplot, Data Provided by IEX Cloud)

Results of the linear regression of monthly returns of Cisco Systems against Vanguard S&P 500 Index ETF:

VOOandCSCO <- read_excel("/CSCO_VOO_LM_September_2022.xlsx", sheet = "Sheet1")
lmCSCOVOO = lm(CSCO_Monthly_Return~VOO_Monthly_Return, data = VOOandCSCO)
summary(lmCSCOVOO)

Call:
lm(formula = CSCO_Monthly_Return ~ VOO_Monthly_Return, data = VOOandCSCO)

Residuals:
      Min        1Q    Median        3Q       Max 
-0.156924 -0.031998 -0.008248  0.038045  0.127839 

Coefficients:
                   Estimate Std. Error t value Pr(>|t|)    
(Intercept)        -0.01062    0.01049  -1.012    0.318    
VOO_Monthly_Return  0.91708    0.18946   4.841 2.31e-05 ***
---
Signif. codes:  0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1

Residual standard error: 0.06426 on 37 degrees of freedom
Multiple R-squared:  0.3877, Adjusted R-squared:  0.3712 
F-statistic: 23.43 on 1 and 37 DF,  p-value: 2.306e-05

The slope of the regression corresponds to the beta of the stock. In this case, Cisco Systems has a beta of 0.91. 
The adjusted R-squared is 0.37. About 37% of Cisco's monthly return is explained by the returns of the S&P 500 index.  
Cisco Systems cannot protect a portfolio against market volatility since it has a beta value close to 1. Cisco's stock will almost entirely reflect the volatility in the market.      

 

No comments:

Post a Comment

J.M. Smucker's Low Correlation With The Vanguard S&P 500 Index ETF

  J.M. Smucker is known for its iconic and timeless consumer staples brands (Exhibit 1) .  Note: Click on each image in this blog post to v...