The Beta is the second consideration of the CAPM that ignites some debate. Forward looking Betas are unobservable so the debate is what kind of method to use in getting these Betas. There are a few compromises in obtaining the Beta. One of these is increasing the number of time periods you’re looking into for the historical date in which you run the risk of including stale data. Another problem is shortening the time periods increases your chances of factoring in unwanted random noise. The
In the Capital Asset Pricing Model, I got a beta of 0.3194 from TSX and the Saputo inc. returns from Jan.2010 to Dec. 2013, and a risk free rate of 0.86% from Bank of Canada. With a Market Risk premium of 6.90%, the Expected rate of returns was
9. (10 points) You are provided with the following monthly expected returns, each of which is represented by E(Ri), and betas for the following stocks. Please estimate the capital asset pricing model and draw conclusions about the significance and realism of the results. (Note: Please use conventional tests of the R-squared and coefficients.) On the basis of your results, please name at least three of the stocks that you would recommend as “buys.”
First, after selecting various assets and determining their monthly prices, the assets’ return is calculated. Asset return is the monthly percentage increase of the asset. Next, the expected return of the portfolio is needed. It is calculated as the weighted average of expected returns of the individual assets within the portfolio. Thereafter it is necessary to define and distinguish between correlation and covariance. Correlation is the measure of how two assets interact with one another, and it can vary between -1 and 1. A correlation of 1 indicates that the two
(a) Estimate the expected return and standard deviation for a portfolio that allocates 50% to stock #1
(1) What is a beta coefficient, and how are betas used in risk analysis? (2) Do the expected returns appear to be related to each alternative’s market risk? (3) Is it possible to choose among the alternatives on the basis of the information developed thus far? Use the data given at the beginning of the problem to construct a graph that shows how the T-bill’s, High Tech’s, and Collections’ beta coefficients are calculated. Discuss what beta measures and explain how it is used in risk analysis.
a particular asset has a beta of 1.2 and an expected return of 10%. The expected return on the market portfolio is 13% an the risk-free is 5%. Which of the following statement is correct?
The table below shows the equity betas for the firms presented in the case (using Jan-92 to Dec-96 equal weight NYSE/AMEX/NASDAQ as market portfolio):
* Expected returns of A and B are 12% and 16%. The betas of A and B are 0.7 and 1.4. T-bill rate is 5%. S&P 500 is expected to earn 13%. Std of A is 12% and that of B is 31% and that of S&P 500 is 18%.
We use the equation ri=(Pt-Pt-1+Dt)/Pt-1 to calculate the monthly return of stock of Charles Schwab Corp, Quick & Reilly Group and Waterhouse Investor Srvcs. Then we have two methods to calculate the Beta of Equity for each company.
This essay will highlight the use of Capital asset pricing model ( CAPM ) to be considered as a pricing theory model for assets . CAPM model helps investors to analyse the risk and what expectation to keep from an investment (Banz , 1981) . There are two types of risk
For estimation of betas, the above equation was run for the period from Jan, 2003 to Dec, 2006. Based on the estimated betas we have divided the sample of 63 stocks into 10 portfolios each comprising of 6 stocks except portfolio no.1, 5 and 10 having seven stocks each. The first portfolio 1 has the 7 lowest beta stocks and the last portfolio 10 has the 7 highest beta stocks. The rationale for forming portfolios is to reduce measurement error in the betas.
So, asset beta for Alice Ltd. equals to 1.5 x [79.05 / (79.05 + 20.95 x (1 – 35))] = 0.08
The current T.bill rate is 3%. (It was 5% one year ago).The stock is currently selling for $50, down $4 over the last year, and has paid a dividend of $2 during the last year and expects to pay a dividend of $2.50 over the next year. The New York Stock Exchange (NYSE) composite has gone down 8% over the last year, with a dividend yield of 3%. HeavyTech Inc. has a tax rate of 40%. a. What is the expected return on HeavyTech over the next year? b. What would you expect HeavyTech’s price to be one year from today? c. What would you have expected HeavyTech’s stock returns to be over the last year? d. What were the actual returns on HeavyTech over the last year? e. HeavyTech has $100 million in equity and $50 million in debt. It plans to issue $50 million in new equity and retire $50 million in debt. Estimate the new beta. a. Using the CAPM, we compute the expected return as 0.03 + 1.2(0.0792) = 12.5%. We use a T‐bill rate, because the focus is on the short‐term expected return (the next year). For the same reason, we use the market premium over bills. b. The cum‐dividend price, one year from now, would be $50 *(1 + 12.50%) = $56.25. The ex dividend price, assuming that the stock price goes down by the amount of the dividend is $56.25– $2.50 = $53.75. c. Over last year, the expected return would have been 0.05+1.2*0.0792=14.5%.
Using the same market risk premium and risk free rate (5.5% & 4.62% respectively) given in the case, the averaged beta of 1.40, the pretax cost of debt of 7.65%, and the weighted average of debt & equity, the products & systems