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BMGT 340
Risk Analysis – CAPM
9 points
CALCULATIONS
Market Risk
Calculate beta by regressing your stock's returns on the returns to your index.
Compare
this to beta that you look up.
You should have at least 2 other estimates of beta (one can come
from Bloomberg).
In the regression analysis, note that the coefficient for the market return on the regression
line is a measure of your company’s beta.
Suppose you run a regression with monthly returns.
The R
2
of the regression tells you how much of the variance in your company comes from market
sources, e.g., interest rate risk, inflation risk, etc.
Suppose your regression has an R
2
of 35%.
This says 35% of the company’s risk comes from market sources and the remaining 65% comes
from firm specific components.
This firm specific risk is diversifiable and is not rewarded in the
CAPM.
Estimate cost of equity
Capital Asset Pricing Model
You can use a current risk free rate, or you can use data from the Netcentricity lab (1318
or 3505VMH) on Treasury security averages.
Most practitioners use a long term risk free rate
(10 year treasury note or 30 year treasury bond rate) in the CAPM equation.
First, look up the
tenyear constant maturity Treasury rate (from the Federal Reserve:
http://www.federalreserve.gov/releases/h15/current/h15.htm
this will be posted on blackboard)
and divide by 12 to get the monthly rate.
(For historical data, go to
http://federalreserve.gov/releases/h15/data/Monthly/H15_TCMNOM_Y10.txt
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 Spring '08
 Bulmash

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