Question
Assume that the Single Index Model holds in practice. Monthly excess returns R i = r i - r f are presented below for each
Assume that the Single Index Model holds in practice.
Monthly excess returns Ri=ri-rf are presented below for each of three stocks and the S&P 500 index for a 6-month period.
You are also given means (ERi), variances (VarRi), and covariances between the stock and the market COVRi,RM.
The risk free rate of interest, rf, is 0.5%
| MONTH | BRK(A) | DOV(B) | WMT(C) | S&P500 |
| 1 | -0.1676 | -0.0800 | -0.0327 | 0.896 |
| 2 | 0.1064 | -0.0033 | -0.0389 | -0.0933 |
| 3 | -0.0729 | -0.0577 | -0.0055 | 0.0375 |
| 4 | -0.1154 | -0.624 | -0.0897 | 0.1014 |
| 5 | 0.0627 | 0.0175 | 0.0617 | -0.0839 |
| 6 | -0.0350 | -0.0094 | -0.0108 | 0.053 |
| Mean | -0.0370 | -0.0325 | -0.0193 | 0.0128 |
| Variance | 0.010997 | 0.001535 | 0.002470 | 0.007024 |
| Covariance | -0.008537 | -0.002914 | -0.002515 | 0.007024 |
Residuals For assets
| Observation | Residuals^2 (asset a) | Residuals^2 (asset b) | Residuals^2 (asset c) |
| 1 | 0.0013870743 | 0.00024316 | 0.0002012 |
| 2 | 0.0002099016 | 0.00021633 | 0.00331297 |
| 3 | 0.0000340277 | 0.00022093 | 0.00051408 |
| 4 | 0.0008584033 | 0.00004805 | 0.00149587 |
| 5 | 0.0003201010 | 0.00009874 | 0.00215358 |
| 6 | 0.0002952085 | 0.00080073 | 0.00016823 |
Compute the alpaha, beta, standard error, expected value of excess returns, treynor ratio, and optimal C*
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Financial Markets And Institutions
Authors: Frederic S. Mishkin, Stanley Eakins
6th International Edition
0321552113, 9780321552112
