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Ques 4. You are estimating the correlation of returns between ONGC and Hero Motor Corp as of late 2018. You run a market model regression
Ques 4. You are estimating the correlation of returns between ONGC and Hero Motor Corp as of late 2018. You run a market model regression for each of the two stocks based on monthly returns, using the Nifty 50 to represent the market. You obtain the following regression results: Estimated Beta for ONGC is 0.78, and residual standard deviation for ONGC is 15.2%. Estimated Beta for Hero Motor Corp is 1.32, and residual standard deviation for Hero Motor Corp is 12%. You estimate the variance of monthly returns on the Nifty 50 which is 32.5%. A. Using the data given, estimate the market model based variances of ONGC and Hero Motor Corp, Covariance and Correlation and between ONGC and Hero Motor Corp using market model estimates. (15 Marks) If the estimated correlation between ONGC and Hero. Motor Corp using their mean returns and tovariance is 0.082, compare this with your estimated correlation coefficient using market model. Why market model correlation coefficient is higher than the directly estimated correlation coefficient? Explain. (5 Marks) . Why would you prefer market model over traditional mean-variance optimization in constructing Variance-Covariance Matrix for your Portfolio Variance calculation? (5 Marks) Ques 4. You are estimating the correlation of returns between ONGC and Hero Motor Corp as of late 2018. You run a market model regression for each of the two stocks based on monthly returns, using the Nifty 50 to represent the market. You obtain the following regression results: Estimated Beta for ONGC is 0.78, and residual standard deviation for ONGC is 15.2%. Estimated Beta for Hero Motor Corp is 1.32, and residual standard deviation for Hero Motor Corp is 12%. You estimate the variance of monthly returns on the Nifty 50 which is 32.5%. A. Using the data given, estimate the market model based variances of ONGC and Hero Motor Corp, Covariance and Correlation and between ONGC and Hero Motor Corp using market model estimates. (15 Marks) If the estimated correlation between ONGC and Hero. Motor Corp using their mean returns and tovariance is 0.082, compare this with your estimated correlation coefficient using market model. Why market model correlation coefficient is higher than the directly estimated correlation coefficient? Explain. (5 Marks) . Why would you prefer market model over traditional mean-variance optimization in constructing Variance-Covariance Matrix for your Portfolio Variance calculation
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