Lecture2_StockPricing

# geographic 2 financial research has shown that other

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Unformatted text preview: rting Dell (beta = 1.5) and As longing MCD (beta = 1.4), we are able to eliminate market risk (beta = -0.1 with t-stat. of -0.23). 5-53 Multifactor model and systematic risks 5-54 Multifactor Models 1 Limitations for CAPM 1. Market index (risk) is not enough to describe all Market market situations (industry-specific factors, geographic factors, competition, etc.) geographic 2. Financial research has shown that other 2. stock/portfolio returns and factors also strongly affect stock returns affect 5-55 Multifactor models: return-based For example, Dell’s stock returns may be For explained by the market and its competitor (HP). See Excel file’s “CAPMplusHP” ri - rf = α + β [rm - rf ]+ c [rX - rf ] rX denotes HP’s excess returns that may explain ri • The result shows that The β = 0.79 (t-stat. = 1.20, not that significant) C = 0.61 (t-stat. = 1.33, not that significant) 0.61 - So, we should drop HP as it does not explain Dell’s stock returns (But we should keep SP500) 5-56 Dell’s Exercise 6 Now, we may think that Dell’s stock return is Now, affected by foreign exchange rate. So, please check the tab “CAPMplusUSDEUR” ri - rf = α + β [rm - rf ]+ c FX - FX denotes the foreign exchange rate (1 USD = ? EUR). EUR). Please estimate the coefficients (and t-statistics) Please of α, β and c 5-57 Multifactor models: non return-based Exercise 6 is a non-return-based multifactor Exercise model model What we have found is the following: β = 0.62 (t-stat. = 1.65, marginally significant) C = -9.02 (t-stat. = -3.77, very significant) -9.02 - So, Dell’s stock returns is negatively correlated with FX, so Dell carries currency risk with 5-58 Currency risk • The estimation of C = -9.02 (significant) makes The sense, why? sense, • A rise of FX (1 USD = ? EUR) means the rise appreciation of USD against EUR, which is against Dell’s interests in two ways: against (1) It makes Dell’s products more expensive in Europe Europe (2) It makes Dell’s revenue in Europe contribute less to its US headquarter less • Thus, the appreciation of USD leads to lower Thus, profits to Dell (and lower stock returns) profits 5-59 The use of multifactor models Hedge risk (e.g., currency risk) for risk-averse Hedge investors investors Profits from speculation - if speculators find a Profits factor expla...
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## This document was uploaded on 03/03/2014.

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