Suppose that you want to use the 10-year historical average return on the Index to forecast the expected future return on the Index. Compute the 95% confidence interval for your estimate of the expected return.

Suppose that you want to use the 10-year historical average return on the Index to forecast the expected future return on the Index. Compute the 95% confidence interval for your estimate of the expected return.

Survey of Accounting (Accounting I)

8th Edition

ISBN:9781305961883

Author:Carl Warren

Publisher:Carl Warren

Chapter15: Capital Investment Analysis

Section: Chapter Questions

Problem 15.1.1MBA

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Concept explainers

Risk and return

Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.

Capital Asset Pricing Model

Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.

Question

Year End Index Realized Return
2000
23.6%
2001
24.7%
2002
30.5%
2003
9.0%
2004
-2.0%
2005
-17.3%
2006
-24.3%
2007
32.2%
2008
4.4%
2009
7.4%

Suppose that you want to use the 10-year historical average
return on the Index to forecast the expected future return on the
Index. Compute the 95% confidence interval for your estimate
of the expected return.

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% Return on T-Bills, Stocks and Market Index States of Economy Probability T-Bills Phillips Pay-up Rubber-Made Market Index Recession 0.2 7 -22 28 10 -13 Below Average 0.1 7 -2 14.7 -10 1 Average 0.3 7 20 0 7 15 Above Average 0.3 7 35 -10 45 29 Boom 0.1 7 50 -20 30 43 Mean 7 16.9 20.7 19.6 15 Variance (%) ^2 0 549.09 244.124 358.04 313.6 Standard Deviation 0 23.4326695 15.6244712 18.92194493 17.7087549 Coefficient of Variation 0 1.386548491 7.54805372 0.965405354 1.18058366 Covariance wit MP 0 .0413 -.0275 .0231 .0314 Correlation with Market Index 0 0.9953 -0.9953 0.6894 1.0000 Beta 0 1.32 - 0.88 0.74 1.00 CAPM Req. Return 7.00 % 17.54 % -0.02% 12.89% 15.00% Valuation ( Overvalued / Undervalued/Fairly Valued) Valued Fairly…
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