{"id":114455,"date":"2018-02-20T23:50:30","date_gmt":"2018-02-20T23:50:30","guid":{"rendered":"https:\/\/writemyessayfree.com\/finc-3321-capital-markets-case"},"modified":"2017-08-03T16:10:18","modified_gmt":"2017-08-03T16:10:18","slug":"finc-3321-capital-markets-case","status":"publish","type":"post","link":"https:\/\/www.benedictsol.com\/blogs\/finc-3321-capital-markets-case\/","title":{"rendered":"FINC 3321: Capital Markets Case"},"content":{"rendered":"
\n

FINC 3321: Capital Markets Case :2 \u2013 The capital asset pricing model (CAPM) (due 4\/23\/17) Instructor: Dr. Nazif Durmaz Case Study Instructions : Use 12-point Times New Roman font. Do not exceed 4 pages in length. The bulk of your grade will be based on your ability to perform the requested analyses and provide an accurate interpretation. Copy and paste only your output for each regression, not the data or residuals. Submit either word (doc) or pdf. No other formats is accepted. Please find the attached XL file (Case2.xlsx). The capital asset pricing model (CAPM) The capital asset pricing model (CAPM) is an important model in the field of finance. It explains variations in the rate of return on a security as a function of the rate of return on a portfolio consisting of all publicly traded stocks, which is called the market portfolio. Generally the rate of return on any investment is measured relative to its opportunity cost, which is the return on a risk free asset. The resulting difference is called the risk premium, since it is the reward or punishment for making a risky investment. The CAPM says that the risk premium on security j is proportional to the risk premium on the market portfolio. That is rj \u2212 rf = \u03b2j(rm \u2212 rf), (0.1) where rj and rf are the returns to security j and the risk-free rate, respectively, rm is the return on the market portfolio, and \u03b2j is the jth security\u2019s \u201dbeta\u201d value. A stock\u2019s beta is important to investors since it reveals the stocks volatility. It measures the sensitivity of security j\u2019s return to variation in the whole stock market. As such, values of beta less than 1 indicate that the stock is defensive since its variation is less than the market\u2019s. A beta greater than 1 indicates an \u201daggressive stock.\u201d Investors usually want an estimate of a stock\u2019s beta before purchasing it. The CAPM model shown above is the \u201deconomic model\u201d in this case. The \u201deconometric model\u201d is obtained by including an intercept in the model (even though theory says it should be zero) and an error term rj \u2212 rf = \u03b1j + \u03b2j(rm \u2212 rf) + e, (0.2) Questions 1. Explain why the econometric model in equation 0.2 is a simple regression model. 2. In the data file Case2.xlsx are data on the monthly returns of six firms (Microsoft, GE, GM, IBM, Disney, and Mobil-Exxon), the rate of return on the market portfolio (MKT), and the rate of return on the risk free asset (RISKFREE). The 132 observations cover January 1998 to December 2008. Estimate the CAPM model for each firm, and comment on their estimated beta values. Which firm appears most aggressive ? Which firm appears most defensive ? 3. Finance theory says that the intercept parameter \u03b1j should be zero. Does this seem correct given your estimates ? For the Microsoft stock, plot the fitted regression line along with the data scatter. 4. Estimate the model for each firm under the assumption that \u03b1j = 0. Do the estimates of the beta values change much ? 1<\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

FINC 3321: Capital Markets Case :2 \u2013 The capital asset pricing model (CAPM) (due 4\/23\/17) Instructor: Dr. Nazif Durmaz Case Study Instructions : Use 12-point Times New Roman font. Do not exceed 4 pages in length. The bulk of your Read More …<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-114455","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/114455","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/comments?post=114455"}],"version-history":[{"count":0,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/114455\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/media?parent=114455"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/categories?post=114455"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/tags?post=114455"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}