470909 f stat 1424056 16 df ssreg 0003551 0003989

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Unformatted text preview: Beta estimation using Excel (1) • Use “LINEST” function and “Ctrl+Shift+Enter” to Use output all relevant statistics output • For more detailed uses, you can google to search • The output is: • Beta 1.499104 -0.00198 Alpha se (beta) 0.397254 0.003909 se (alpha) R^2 0.470909 F-stat 14.24056 16 d.f. SSreg 0.003551 0.003989 SSresidual 0.01579 se 5-49 Beta estimation using Excel (2) • Use “Regression analysis” in “Data analysis” (You Use • • • • will need to include “Analysis Toolpak” in “Add-ins”) will Letting risk-free rate fixed for simplicity Coefficient of “X Variable 1” is the estimated Coefficient market beta for the individual stock market Dell’s market beta = 1.50 (of t-stat = 3.77 and confidence interval [0.657, 2.341]), what does that mean? Dell’s alpha = -0.002 (of t-stat = -0.51 and confidence interval [-0.010, 0.006]), what does that mean? 5-50 Beta estimation using Excel (3) • Dell’s market beta = 1.50 (of t-stat = 3.77 and confidence interval [0.657, 2.341]) - It means that Dell is risky in the sense that, when the market goes up by 10%, Dell over-reacts and goes up by 15%. Thus, Dell carries higher market risk (because it is very sensitive to market moves) • Dell’s alpha = -0.002 (of confidence interval [-0.010, 0.006]) - It means that Dell does not provide abnormal returns, consistent with efficient market hypothesis 5-51 Exercise 5 • Now, try to estimate the alpha and beta of HP’s daily data (in “HP” tab) and see if you can get this outcome Coefficients St. Err. Alpha Market beta t Stat -0.00247 0.002102 -1.17267 1.16852 0.213651 5.469295 5-52 Hedge risk using factor models Let’s use market risk (market premium) as the Let’s only risk source for simplicity for The question is “How can we hedge market risk?” We will see an example that hedge market risk We (i.e., eliminate the market risk) (i.e., For Excel, see “HedgeMarketRisk” in For “Lecture2_StockPricing” “Lecture2_StockPricing” As you can see, by sho...
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