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ch09Problems

# ch09Problems - T HE E CONOMICS OF F INANCIAL M ARKETS R E...

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THE ECONOMICS OF FINANCIAL MARKETS R. E. BAILEY Exercises for Chapter 9 Empirical appraisal of the CAPM and APT 1. The following table contains ten years of excess return data for the ordinary shares of ABC plc and the market portfolio. Discuss how could you use this information to obtain an estimate of the beta-coefﬁcient for ABC plc’s ordinary shares and calculate such an estimate. Year ABC plc Market Portfolio 1 5.40% 3.50% 2 12.05 8.65 3 13.00 9.80 4 7.65 5.55 5 6.95 4.10 6 - 2.65 - 1.00 7 - 3.25 - 2.50 8 3.60 1.85 9 3.25 3.05 10 5.40 4.60 2. Consider a world with three assets for which time series estimations yield: Asset 1: ( r 1 t - r 0 t ) = 0 . 09 + 1 . 50 × ( r Mt - r 0 t ) + (residual) 1 t Asset 2: ( r 2 t - r 0 t ) = 1 . 05 + 0 . 40 × ( r Mt - r 0 t ) + (residual) 2 t Asset 3: ( r 3 t - r 0 t ) = 0 . 10 + 1 . 20 × ( r Mt - r 0 t ) + (residual) 3 t . You also calculate that the average rates of return on the two assets are: r 1 = 0 . 20 , r 2 = 0 . 14 and r 3 = 0 . 16 , respectively. (a) Explain, in as much detail as you can, how to estimate the Security Market Line from
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