corp_Ch10_09 - Statistical work to investigate beta...

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Unformatted text preview: Statistical work to investigate beta estimates in Figure 9.2 60 monthly (latest 5 years) rates of return were calculated for the period Jan Augu 1. The worksheets: xom, gm, dell, and SP500 include data downloaded from yahoo! for General Motors and Dell. The column to be used to calculate total returns is the close price adjusted stock dividends . 2. The worksheet "Regressions" includes (on the left) the adjusted close prices of the S&P500 index stocks (columns A-E). The next set of columns (G-J) calculate the rates of return from the adjusted c 3. Columns M-P were downloaded from the Fama-French website and include excess returns on a b portfolio (NYSE+AMEX+NASDAQ), returns on the portfolios SMB and HML (explained below), and th rate calculated from prices of one-month T-bills. The T-bill rate was used to calculate the excedss re stocks and the SP500 in columns Q-T. 4. The SMB portfolio (SMB stands for "small minus big") is composed of a long position in small stoc position in large stocks. Thus the rate of return on SMB is the returns on small stocks minus returns o stocks. 5. The HML portfolio (HML stands for "high minus low") is composed of a long position in value stock book-to-market ratios, and short position in growth stocks (with low book-to-market ratios). Typical va have a relatively high ratio of book to market (B/M), because these corporations' profits have already book values. Typical growth stocks are yet to show potential profits which are already showing in ma hence a low B/M. 6. The most notable deviations from the CAPM equation are: (1) the size effect -- historical average r small-firm stocks are higher than on large-firm stocks. This is explained by the fact that small stocks ways that are not adequately reflected in beta estimates. (2) The value vs. growth effect -- historical returns on value firms have been larger than those of growth stocks. There is no good explanation f yet (it's a hot topic), but the effect in the data is clear. (3) Historical returns on low beta stocks are too those on high beta stocks too low relative to CAPM predictions. This is reflected in positive intercepts the SCL of low beta stocks and negative intercepts for high beta stocks. This effect is captured to a g by the SMB and HML portfolios (see below), but still remains in exterme beta stocks....
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This note was uploaded on 05/06/2010 for the course IRPS IRGN 424 taught by Professor Kane during the Fall '09 term at UCSD.

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corp_Ch10_09 - Statistical work to investigate beta...

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