Q1:Index Models:

Download 61 months (November 2014 to December 2019) of monthly data for the S&P 500 index (symbol = ^GSPC). Download 61 months (November 2014 to December 2019) of Apple Inc. data and 61 months (November 2014 to December 2019) of Exxon Mobil Corporation data. Download 60 months (December 2014 to December 2019) of the 13 week T-bill rate (symbol = ^IRX).

Be sure to use end-of-month data! Construct the following on a spreadsheet:

1. Calculate 60 months of returns for the S&P 500 index, Apple and Exxon. (Please compute simple monthly returns not continuously compounded returns.)Use November 2014 to December 2019. Note this means you need price data for October 2014.On the excel report the average monthly returns for the S&P 500 index, Apple, and Exxon, as well as the average monthly risk-free rate.

1. Calculate excess returns for the S&P 500 index, Apple and Exxon. Note you must divide the annualized risk-free rate (^IRX) by 1200 to approximate the monthly rate in decimal form.On the excel report the average monthly excess returns for the S&P 500 index, Apple and Exxon.

1. Regress excess Apple returns on the excess S&P 500 index returns and report, on the excel, , , the r-square and whether and are different from zero at the 10% level of significance. Briefly explain your inference.

1. Use equation 8.10 to decompose the total risk for Apple into systematic risk and firm-specific risk. That is, calculate total risk, systematic risk, and firm-specific risk for Apple.

See chapter 8 text, the section on "Risk and Covariance in the Single-Index Model" likely on p. 260

1. Regress excess Exxon returns on the excess S&P 500 index returns and report, on the excel, , , the r-square and whether , are different from zero at the 10% level of significance.Briefly explain your inference.

1. Use equation 8.10 to decompose the total risk for Exxon into systematic risk and firm-specific risk. That is, calculate total risk, systematic risk, and firm-specific risk for Exxon. See #4 above

1. Use equation 8.10 to estimate the covariance and correlation of Apple and Exxon excess returns.

See chapter 8 text, the section on "Risk and Covariance in the Single-Index Model" likely on p. 260

Q2:CAPM and APT:

1.The expected rate of return on the market portfolio is 9.75% and the risk-free rate of return is 1.75%.The standard deviation of the market portfolio is 19%.What is the representative investor's average degree of risk aversion?

Expected return on the market

Risk-free rate

Standard deviation of market

Variance of market

Average degree of risk aversion A bar

A bar if use 1/2 A formula

2.Stock A has a beta of 1.50 and a standard deviation of return of 35%.Stock B has a beta of 3.25 and a standard deviation of return of 60%.Assume that you form a portfolio that is 40% invested in Stock A and 60% invested in Stock B.Using the information in question 1, according to CAPM, what is the expected rate of return on your portfolio?

Stock

Beta

Weight

Std. Dev.

Exp. Return by CAPM

A

1.50

40.00%

B

3.25

60.00%

Portfolio

2.55

3.Using the information in questions 1 and 2, what is your best estimate of the correlation between stocks A and B?

4.Your forecasting model projects an expected return of 12.50% for Stock A and an expected return of 32.00% for Stock B.Using the information in questions 1 and 2 and your forecasted expected returns, what is your best estimate of the alpha of your portfolio when using CAPM to determine a fair level of expected return?

Stock

Weight

Forecasted Return

Alphas

A

40.00%

12.50%

-1.25%

B

60.00%

32.00%

4.25%

Portfolio

24.20%

Alpha = =

5.A different analyst uses a two-factor APT model to evaluate expected returns and risk.The risk premiums on the factor 1 and factor 2 portfolios are 4.25% and 2.50%, respectively, while the risk-free rate of return remains at 1.75%.According to this APT analyst, your portfolio formed in question 2 has a beta on factor 1 of 2.75 and a beta on factor 2 of 3.75.According to APT, what is the expected return on your portfolio if no arbitrage opportunities exist?

Risk-Free

Rate

Factor #1

Factor #2

Risk Premiums

Coefficients

APT Expected Rate of Return =

6.Now assume that your forecasting model of question 4 accurately projects the expected return of Stocks A and B and therefore your portfolio and that the APT model of question 5 describes the fair rate of return for your portfolio.Does arbitrage opportunities exist?If yes, would you invest long or short in your portfolio constructed in question 2?

APT Expected Rate of Return =

%

APT Fair Rate of Return =

%

Portfolio Alpha =

%

Arbitrage Opportunities?

?

Long or Short?

?

Please provide excel sheets to show work/formulas