Factors affecting Beta 1 time period you choose 2 Type of returns used daily

Factors affecting beta 1 time period you choose 2

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Factors affecting Beta (1) time period you choose (2) Type of returns used - daily, weekly, annual, etc (3) what is used as proxy for market pf returns (eg. S&P 500) Security Market Line (SML) directly translates beta into an est required rate of return. Slope = Mkt premium risk = reward-to-risk ratio= R m R f Y- intercept: Risk-free rate, assumes σ = 0 . *Same mkt, same SML Expected > Required Above SML Underpriced stock/asset (shd buy) Expected < Required Below SML Overpriced stock/asset (shd sell) Expected = Required On SML Fairly priced stock/asset Capital Asset Pricing Model for both physical and financial assets. Required rate of return, R M = Market rate. B (Rm – Rf) = req risk premium of sec Ri – Rf = expected risk premium of sec. R M R f = ¿ risk premium/reward to risk ratio/slope R f = ¿ time value of money/risk free rate Factors affecting CAPM 1. Pure time value of money – measured by the risk-free rate (Rf) 2. Reward (risk premium) for bearing systematic risk determined by the: (i) Systematic risk measure (captured by Beta) (ii) Market risk premium Project Valuation After calculating the required rate of return (which is i/y), calc for pv to see how much you shouldn’t pay more than for each time period, then add tgt. Acc to CAPM, security’s expected return is positively and linearly related to security’s beta. CAPM defines the relationship between risk and required rate of return. Extremely large no. of bond issues, but generally low daily volume in single issues CAPM defines the relationship between risk and required rate of return r ˆ Mean Deviation Standard Return of Rate Expected Deviation Standard CV i RF i RP r r i RF M RF r r r
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Many analysts use S&P500’s returns as a ‘proxy’ for mkt portfolio returns (to be used in the CAPM). The returns of the company of interest are then regressed on S&P’s returns to find the company’s beta. Markowitz Portfolio Theory portfolio return against portfolio sd. Efficient portfolio is one that: (1) provides greatest expected return for a given lvll of s.d. (risk) or (2) lowest risk for a given expected return. Rational investor shdnt choose any other portfolio. Mkt portfolio is the portfolio at tangent line of the risk free asset with the efficient frontier of all risky assets available. Capital Mkt Lin (CML ) is the tangent line drawn from the point of the risk- free asset to the feasible region for risky assets. Tangency point represents the market portfolio; hence all rational investors should hold their risky assets in the same proportions as their weights in the market portfolio
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