How can I estimate the rate of return on a stock?

Question

How can I estimate the rate of return on a stock over the next year, using data from Yahoo! Finance or other online sources (please tell me where and what data)?

Thanks!

Answer 1

You can subscribe to The Wall Street Journal on line or you can track the stock through any number of bloggers who do that sort of thing. Google the company's name and see what flies. Is this a school project and you are just too lazy to do your homework?

Answer 2

dont buy stock. why not do something that is risk free?

Answer 3

there are different ways to do it, and the answer kind of depends on why you are asking.  is it for college homework?  for your own personal investing.

Expected rates of returns can be calculated many ways, with the most common being various forms of the Capital ASset Pricing Model.  I'll get back to the CAPM in  a second.

First though, your expected RoR is = Capital Gains + Dividends, so the formula would be

(CapGains + Dividends) / Beginning Stock Price

But CAPM is widely used in the 'real world', although there are many different variations, and there is alot of controvsey ou there re so many aspects.  but to keep things simple, if I was to calculate a company's expected return for the next year, the formula would be:

Rf + Beta(1 Yr. ERP) + Alpha

Rf = risk free rate, in this case the one year tbill yield

Beta = one year beta of your company's stock

ERP = Equity Risk Premium, which is generally calculated on a long-term basis.  check Ibbotson for this kind of info, or justify an ERP using logic.  you can also justify your expected cap gains in the first formula using logic and empirical data

Alpha = is teh critical part, b/c that is the additional risk/return characteristics specific to the company you're analyzing.

so, the more risky the ocmpany, the higher the alpha.  so in this example, say the numbers work out to be:

4% + 1.1(5) + Alpha;

= 9.5% + Alpha.

Say that your company has a poor management team.  an unhealthy balance sheet, and declining sales and margins.  your alpha might be very high.  say 5.5%, for  a total expected one year return of 15%.

or say your company is growing like crazy, has great liquidity, manages working capital very well, etc etc.  maybe their alpha is negative 1.

so 8.5% is your expected return.  implying it's less risky.  the higher the risk, the higher your alpha.

this is a simple example.  and you can also reconcile the various caluclations you get.

also, ibbotson's cost of capital provides all kinds of premia, such as size premia (small companies are more risky), industry premia, etc. .  that's in the ibottson SBBI book.

the ibottson Cost of Capital Yearbook also has good info by industry.

Answer 4

You can't.

You could look at the company's financial reports and see what they forecast and try to see what that will do to the P/E and make a guess.  There are so many factors and speculative unknowns, what you're suggesting is not possible for even the executives of the company.