Using 625 trading days of data, you estimated the daily log return follows a normal distribution with a mean of 5 bps and and a stdev of 125 bps. Q1a. based on information above, what is the probability of true daily log return average is 0? can you reject the true mean is 0? can you reject the true mean is 10 bps? Q1b. what is the 90, 95, and 99% confidence interval for your mean return estimate? Q1c. what is the mean log return and stdev of log return over one year period and four year period (assuming 252 trading days per year)?
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.
. Using 625 trading days of data, you estimated the daily log return follows a
Q1a. based on information above, what is the probability of true daily log return average is 0? can you reject the true mean is 0? can you reject the true mean is 10 bps?
Q1b. what is the 90, 95, and 99% confidence interval for your mean return estimate?
Q1c. what is the mean log return and stdev of log return over one year period and four year period (assuming 252 trading days per year)?
Q1d. based on Q1c what is the probably of losing money (negative log return) or doubling your money (total log return = ln(2)) over 1 year and 4 year period?
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