Project 2 Risk Analysis

Project 2 Risk Analysis - BMGT 340 Risk Analysis CAPM 9...

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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 ten-year 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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