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ch08_10 - 9-1 Lecture V(Chapters 8&10(7th/8thedition...

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Unformatted text preview: 9-1 Lecture V (Chapters 8&10 (7th/8thedition)) 9-2 Chapter 8 9-3 Lecture V – p.3 FIN 6275 Reduces the number of inputs for diversification. Easier for security analysts to specialize. Advantages of the Single Index Model 9-4 Lecture V – p.4 FIN 6275 Single Factor Model βi= index of a securities’ particular return to the factor F= unanticipated movement in some macro factor; F is commonly related to security returns Assumption: a broad market index like the S&P500 is the common factor. rit=E(rit)+βiFt+eit9-5 Lecture V – p.5 FIN 6275 Asset Risk Premium Market Risk Prem αi = the stock’s expected return if the market’s excess return is zero: (rm- rf)= 0 ßI (rm- rf)= the component of return due to movements in the market index ei = firm specific component, not due to market movements Single Index Model rit−rf=αi+βi(rMt−rf)+eit9-6 Lecture V – p.6 FIN 6275 Let: Ri = (ri- rf) Rm = (rm- rf) Risk premium format Risk Premium Format Rit=αi+βiRMt+eit9-7 Lecture V – p.7 FIN 6275 MAKE THE DIFFERENCE! Single index model= Regression Equation (actual returns) Asset-Pricing model= Expectedreturn-beta relationship Single Factor model = assumption that one common factor drives ‘shocks’in returns Rit=αi+βiRMt+eitrit=E(rit)+βiFt+eitE(Rit)=βiE(RMt)9-8 Lecture V – p.8 FIN 6275 Expected Returns: ASSET-PRICING MODEL (examples: CAPM, APT) Unexpected Returns: FACTOR MODEL Realized Returns: INDEXMODELPutting it all together 9-9 Lecture V – p.9 FIN 6275 Security Characteristic Line Based on a time-series regression ExcessReturns (i) SCL . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . Excessreturns on market index . . . Rit=αi+βiRMt+eit9-10 Lecture V – p.10 FIN 6275 Jan. Feb. . . Dec Mean Std Dev 5.41 -3.44 . . 2.43 -.60 4.97 7.24 .93 . . 3.90 1.75 3.32 Excess Mkt. Ret. Excess GM Ret. Data Example 9-11 Lecture V – p.11 FIN 6275 Estimated coefficient Std error of estimate Variance of residuals = 12.601 Std dev of residuals = 3.550 R-SQR = 0.575 β-2.590 (1.547) 1.1357 (0.309) rGM- rf = α+ β(rm- rf) αRegression Results 9-12 Lecture V – p.12 FIN 6275 Market or systematic risk: risk related to the macro economic factor or market index....
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ch08_10 - 9-1 Lecture V(Chapters 8&10(7th/8thedition...

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