380 Final project - FIN 380 Project 1 CAPM Analysis Capital...

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FIN 380 Project 1 CAPM Analysis Capital Asset Pricing Model (CAPM) refers to a model that delineates the relationship between risk and expected return and what is used in the pricing of risky securities. Apple Regression Statistics According to a regression of Apple monthly stock returns against the Hewlett-Packard monthly returns, only 24.67% of the variance of Apple’s excess returns is explained by the variation in the excess returns of the index. The Alpha for Apple stock was slightly positive at 0.024% suggesting a narrow undervaluation by the market. With a T-Stat of 2.7, the computed Alpha is right at the edge of being statistically significant (T-Stat >= 2). And based on a p-value of 0.00896 we can confidently reject that Alpha for Apple stock is zero at the 95% confidence level. The Beta for Apple stock is 0.833 (SE of 0.191) with a T-stat: 4.358 and p-value: 0.000054337 and we can reject that the true Beta differs from zero. HP Regression Statistics Based on a calculated R 2 of 0.3822% of the variance of HP’s excess returns is explained by the variance in the market. We computed that Alpha for HP stock is -0.01595%, but considered with statistically insignificant based on a -1.4296 T-stat. With a 0.1582 P-value we cannot reject that the true Alpha is zero. Computed Beta for HP is 1.417 (SE of 0.199) and we can confidently reject that the true Beta is zero based on a T-stat: 5.991. SML (Security Market Line) The SML is a useful tool in determining whether an asset being considered for a portfolio offers a reasonable expected return for risk. Individual securities are plotted on the SML graph. If the security's risk versus expected return is plotted above the SML, it is undervalued because the investor can expect a greater return for the inherent risk. A security plotted below the SML is overvalued because the investor would be accepting less return for the amount of risk assumed. Risk free rate: The theoretical rate of return of an investment with zero risk. The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment over a specified period of time. Usually, we consider the T-bill is risk free. In this case, we have gotten
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FIN 380 Project 2 information about the T-bill from Yahoo Finance in the last 60 months. The mean of them are 0.058%. We are going to calculate yearly return so 0.058%*12= 0.696%. Market portfolio: Market portfolio is a portfolio consisting of a weighted sum of every asset in the market, with weights in the proportions that they exist in the market. In US, S&P 500 is the most commonly used in practice by investors, that’s why we choose it as our Market portfolio. Using the same method as risk free rate, we could calculate the market return is 0.06%*12=0.72% and the observed returns are 42.32% (Apple), 3.00% (HP). The SML is the formula to calculate the investment returns of these four companies’ stock in relation to the stock’s systematic risk. Here is the SML’s formula:
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