08 rf 03 x 125 erx 03 12508 13 or 13 y

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Unformatted text preview: 8 rf = .03 βx = 1.25 E(rx) = .03 + 1.25(.08) = .13 or 13% βy = .6 e(ry) = .03 + .6(.08) = .078 or 7.8% 7-12 Graph of Sample Calculations E(r) SML Rx=13% .08 Rm=11% Ry=7.8% 3% .6 βy 1.0 1.25 βx β 7-13 Example of estimating beta See class web page, Excel and SAS examples “How to calculate CAPM beta for IBM.” Regress excess monthly returns of IBM on the market excess returns and an intercept. Coefficient on the market excess returns is beta. In practice, most providers of betas use 5 years of monthly data to estimate betas. 7-14 Sources of beta In practice, most providers of betas use 5 years of monthly data to estimate betas. Sources of betas General Electric beta: http://finance.yahoo.com/q/ks?s=GE Downloading all firm’s betas: http://www.finviz.com/screener.ashx See class web page, Excel and SAS examples: “Data on all firm betas.” 7-15 Histogram of CAPM betas 900 800 700 500 Frequency 400 300 200 100 >5 4 3 2 1 0 -1 -2 0 -3 Count 600 Beta 7-16 Some CAPM examples See class page on Blackboard 7-17 Disequilibrium Example Suppose a security with a β of 1.25 is offering expected return of 15%. According to SML, it should be 13%. Under-priced: offering too high of a rate of return for its level of risk. Price should go up if expected return moves from 15% to 13%. 7-18 Disequilibrium Example Analyst consensus forecast E(r) SML 15% Positive alpha Rm=11% rf=3% 1.0 1.25 β 7-19 Empirical Example On class web page “Excel and SAS examples”: CAPM performance across B/M deciles 7-20 The CAPM performance across BE/ME deciles This table reports the results from the unconditional CAPM including the intercept α (in percentage), the annualized means m and the volatilities σ . All the t-statistics are calculated using the Newey -West (1987) correction with 6 lags. Panel A: 10 BE/ME deciles – Jan. 1927: Dec. 2001 M σ α tα β tβ Low 0.11 2 0.12 3 0.12 4 0.11 5 0.13 6 0.13 7 0.14 8 0.15 9 0.17 High 0.17 HML 0.05 0.20 0.19 0.18 0.21 0.19 0.21 0.23 0.23 0.27 0.31...
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This document was uploaded on 02/27/2014 for the course FIN Derivative at San Diego State.

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