BETA CALCULATION:

While dividends contribute a stocks rate of return, Salesforce.com doesnt payout

dividend. The company has an average monthly return of 0.99% over the past three years.
Though having low return, Salesforce.com has a high standard deviation (SD) of 14.05%. A high
SD means 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
Salesforce.com 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, including Salesforce.com.
1
The
market has negative rate of return (-0.79%) but with lower SD (4.36%). Note that investors want
low risk investment with high rate of return.
Based on the high low close graph of Salesforce.com, we observed significant
difference in the companys 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
companys 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 42.49%, 42.49% of the variation on

1
Yahoo Finance, S&P 500 INDEX, RTH (^GSPC). http://finance.yahoo.com/q/cp?s=^GSPC&alpha=C (accessed
February 23, 2009)
$0
$10
$20
$30
$40
$50
$60
$70
$80
High Low Close Chart on Salesforce.com
(CRM)
December 2005 - December 2008
returns is explained by our return in Salesforce. We calculated a 0.03 coefficient of relationship,
which means that the return in market has a weak positive impact to the return in Salesforce
stock. If the return on market goes up, the return on Salesforce stock will go up as well. The test
of significance (T-test/ T-stat), returned a number of 1.4312. It is to test that the coefficient is not
zero. Meanwhile, we received a P-value of 0.1615. 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
(Check Footnote here).
The beta that we calculated is different from the published beta from ValueLine.com (2.1
versus 1.15). Neither of these betas is incorrectly calculated. The difference lies on the selection
of data used to calculate the beta. ValueLine.com uses NYSE as the market proxy. Also, the
timeline for rates of return from ValueLine.com is longer; five instead of three years.
Furthermore, Value Line uses the most recent five years of returns, whereas we analyzed three
years ending December 2008. In addition, we utilized monthly rates of return while
ValueLine.com uses weekly percentage changes in stock price.
3



2
Davies, Simon. "4 and 5." http://www.simon-davies.org.uk/Interpreting_OLS_Output(cross-sectional).pdf
(accessed February 23 2009).
3
Value Line, Glossary of Investment Terms. http://valueline.com/sup_glossb.html (accessed February 23, 2009)
3.48%
-3.02%
-9.52%
-29.03%
CLH




Portfolio




CRM




0.49%
-23.83%
-11.61%
Market Index
-40.00%
-30.00%
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
0.00 0.50 1.00 1.50 2.00 2.50 3.00
E
[
R
]

Beta
Security Market Line
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] = 3.48% + beta(-9.52% - 3.48%)
which derives from: E[R] = R (f) + [ R(Mp) ]
@ E[R] = R (f) + [ R (f) R (M) ] ;
Where R(f) is risk free rate, is beta, R(M) is market risk return, and R(Mp) is market risk
premium.
Negative 23.83% is the annual E(x) one would expect from investing in Salesforce.com. Yet, the
actual observed return is 11.87%. This leads to an abnormal positive return of 35.70%, a figure
that would attract the investors to hold the stocks (see appendix). The variance for
Salesforce.coms returns too is higher than T-Bills which means the Salesforce.coms stock is
more volatile compared to T-Bills. As we explained before, this shows that the security is
unpredictable.