Question
Question 3 (10 points) The capital asset pricing model (CAPM) is well known in finance. It explains variations in the rate of return on a
Question 3 (10 points) The capital asset pricing model (CAPM) is well known in finance. It explains variations in the rate of return on a security as a function of the rate of return on a portfolio consisting of all publicly traded stocks (the so-called market portfolio). Generally, the rate of return on an investment is measured relative to its opportunity cost, which is the risk-free return. The resulting difference is called the risk premium, since it is the reward or punishment for making a risky investment. The CAPM says that the risk premium on a security is proportional to the risk premium on the market portfolio. That is, r rf = (rm rf) where r = return to a security, rf = risk-free return, and rm = return on the market portfolio, and is that securitys beta value. A stocks beta is important to investors since it reveals the stocks volatility. It measures the sensitivity of that securitys return to variation in the whole stock market. As such, values of beta less than 1 indicate that the stock is defensive since its variation is less than the markets. A beta greater than 1 indicates an aggressive stock. Investors usually want an estimate of a stocks beta before purchasing it. The CAP model above is the economic model. The econometric model is obtained by including an intercept () in the model (even though theory says it should be zero) and an error term: rp = + mpr + e where rp= r rf = risk premium on a security, mpr= (rm rf) = risk on the market portfolio. The data file capmod.dta contains 132 monthly observations on the risk premium (rp) of six firms Disney (rpdis), GE (rpge), GM (rpgm), IBM (rpibm), Microsoft (rpmsft), and Mobil-Exxon (rpxom), and on the risk associated with the market portfolio (mpr). The 132 observations run from January 1998 to December 2008. (a) Estimate the model for each firm and present your results compactly in the form of a table (See below). You will have a total of six regressions, one for each firm. (6 points) Just type six regression commands one after the other in Stata. . reg rpdis mpr . reg rpge mpr . and so on for the four remaining companies. (b) Comment on the estimated beta values. Which firms appear aggressive? Defensive? (4 points) Table for Reporting Regression Results The numbers for Disney given below are fictitious and meant only for illustrative purposes. Estimates of the CAP Model Variable Disney GE GM IBM Microsoft Mobil- Exxon Constant (a) 0.0253 mpr (b) 0.7645 r2 0.43 n 132 The constant a is the OLS estimate of and b is the OLS estimate of .
Question 3 (10 points) The capital asset pricing model (CAPM) is well known in finance. It explains variations in the rate of return on a security as a function of the rate of return on a portfolio consisting of all publicly traded stacks (the so-called market portfolio). Generally, the rate of return on an investment is measured relative to its opportunity cost, which is the risk-free return The resulting difference is called the risk premium, since it is the reward or punishment for making a risky investment. The CAPM says that the risk premium on a security is proportional to the risk premium on the market portfolio. That is, ---Blerim ) where r = return to a security, r;= risk-free return, and r.= return on the market portfolio, and B is that security's "beta" value. A stock's beta is important to investors since it reveals the stock's volatility. It measures the sensitivity of that security's return to variation in the whole stock market. As such, values of beta less than 1 indicate that the stock is "defensive" since its variation is less than the market's. A beta greater than 1 indicates an "aggressive stock." Investors usually want an estimate of a stock's beta before purchasing it. The CAP model above is the "economic model". The "econometric" model" is obtained by including an intercept (a) in the model (even though theory says it should be zero) and an error term: fp = a + Bmpre where rp=r-fj= risk premium on a security, mor=lta - ) = risk on the market portfolio. The data file capmod. dto contains 132 monthly observations on the risk premium (rp) of six firms - Disney (rpdis), GE (rpge), GM (rpm), IBM (rpibm), Microsoft (rpmsft), and Mobil-Exxon (rpxom), and on the risk associated with the market portfolio Impr). The 132 observations run from January 1998 to December 2008 (a) Estimate the model for each firm and present your results compactly in the form of a table (See below). You will have a total of six regressions, one for each firm. (6 points) Just type six regression commands one after the other in Stata reg rpdis mpr reg rpge mpr and so on for the four remaining companies (b) Comment on the estimated beta values. Which firms appear aggressive? Defensive? (4 points) Table for Reporting Regression Results The numbers for Disney given below are fictitious and meant only for illustrative purposes. Estimates of the CAP Model Disney Mobil- Variable GE GM IBM Microsoft Exxon 0.0253 Constant (o) mpr (6) 0.7645 0.43 132 n The constanta is the OLS estimate of aand b is the OLS estimate of Question 3 (10 points) The capital asset pricing model (CAPM) is well known in finance. It explains variations in the rate of return on a security as a function of the rate of return on a portfolio consisting of all publicly traded stocks (the so-called market portfolio). Generally, the rate of return on an investment is measured relative to its opportunity cost, which is the risk-free return. The resulting difference is called the risk premium, since it is the reward or punishment for making a risky investment. The CAPM says that the risk premium on a security is proportional to the risk premium on the market portfolio. That is, 1-1 =Brn-1) where r = return to a security, ni= risk-free return, and r = return on the market portfolio and B is that security's "beta* value. A stock's beta is important to investors since it reveals the stock's volatility. It measures the sensitivity of that security's return to variation in the whole stock market. As such, values of beta less than 1 indicate that the stock is "defensive" since its variation is less than the market's. A beta greater than 1 indicates an "aggressive stock. Investors usually want an estimate of a stock's beta before purchasing it. The CAP model above is the "economic model". The "econometric" model" is obtained by including an intercept (a) in the model (even though theory says it should be zero) and an error term: p=a+Bmpre where rp=r-7 = risk premium on a security,mprar.-1) = risk on the market portfolio The data file capmod.dte contains 132 monthly observations on the risk premium (rp) of six firms - Disney (rpdis), GE (rpge), GM (rpm), IBM (rpibm), Microsoft (rpmsft), and Mobil-Exxon (rpxom), and on the risk associated with the market portfolio (mpr). The 132 observations run from January 1998 to December 2008 (a) Estimate the model for each firm and present your results compactly in the form of a table (See below). You will have a total of six regressions, one for each firm. (6 points) Just type six regression commands one after the other in Stata, reg rpdis mpr reg rpge mpr and so on for the four remaining companies (6) Comment on the estimated beta values. Which firms appear aggressive? Defensive? (4 points) Table for Reporting Regression Results The numbers for Disney given below are fictitious and meant only for illustrative purposes. Estimates of the CAP Model Variable Disney Microsoft GE GM IBM Mobil- Exxon 0.0253 Constant (a) mpr (b) 0.7645 0.43 n 132 The constante is the OLS estimate of aand b is the OLS estimate of Question 3 (10 points) The capital asset pricing model (CAPM) is well known in finance. It explains variations in the rate of return on a security as a function of the rate of return on a portfolio consisting of all publicly traded stacks (the so-called market portfolio). Generally, the rate of return on an investment is measured relative to its opportunity cost, which is the risk-free return The resulting difference is called the risk premium, since it is the reward or punishment for making a risky investment. The CAPM says that the risk premium on a security is proportional to the risk premium on the market portfolio. That is, ---Blerim ) where r = return to a security, r;= risk-free return, and r.= return on the market portfolio, and B is that security's "beta" value. A stock's beta is important to investors since it reveals the stock's volatility. It measures the sensitivity of that security's return to variation in the whole stock market. As such, values of beta less than 1 indicate that the stock is "defensive" since its variation is less than the market's. A beta greater than 1 indicates an "aggressive stock." Investors usually want an estimate of a stock's beta before purchasing it. The CAP model above is the "economic model". The "econometric" model" is obtained by including an intercept (a) in the model (even though theory says it should be zero) and an error term: fp = a + Bmpre where rp=r-fj= risk premium on a security, mor=lta - ) = risk on the market portfolio. The data file capmod. dto contains 132 monthly observations on the risk premium (rp) of six firms - Disney (rpdis), GE (rpge), GM (rpm), IBM (rpibm), Microsoft (rpmsft), and Mobil-Exxon (rpxom), and on the risk associated with the market portfolio Impr). The 132 observations run from January 1998 to December 2008 (a) Estimate the model for each firm and present your results compactly in the form of a table (See below). You will have a total of six regressions, one for each firm. (6 points) Just type six regression commands one after the other in Stata reg rpdis mpr reg rpge mpr and so on for the four remaining companies (b) Comment on the estimated beta values. Which firms appear aggressive? Defensive? (4 points) Table for Reporting Regression Results The numbers for Disney given below are fictitious and meant only for illustrative purposes. Estimates of the CAP Model Disney Mobil- Variable GE GM IBM Microsoft Exxon 0.0253 Constant (o) mpr (6) 0.7645 0.43 132 n The constanta is the OLS estimate of aand b is the OLS estimate of Question 3 (10 points) The capital asset pricing model (CAPM) is well known in finance. It explains variations in the rate of return on a security as a function of the rate of return on a portfolio consisting of all publicly traded stocks (the so-called market portfolio). Generally, the rate of return on an investment is measured relative to its opportunity cost, which is the risk-free return. The resulting difference is called the risk premium, since it is the reward or punishment for making a risky investment. The CAPM says that the risk premium on a security is proportional to the risk premium on the market portfolio. That is, 1-1 =Brn-1) where r = return to a security, ni= risk-free return, and r = return on the market portfolio and B is that security's "beta* value. A stock's beta is important to investors since it reveals the stock's volatility. It measures the sensitivity of that security's return to variation in the whole stock market. As such, values of beta less than 1 indicate that the stock is "defensive" since its variation is less than the market's. A beta greater than 1 indicates an "aggressive stock. Investors usually want an estimate of a stock's beta before purchasing it. The CAP model above is the "economic model". The "econometric" model" is obtained by including an intercept (a) in the model (even though theory says it should be zero) and an error term: p=a+Bmpre where rp=r-7 = risk premium on a security,mprar.-1) = risk on the market portfolio The data file capmod.dte contains 132 monthly observations on the risk premium (rp) of six firms - Disney (rpdis), GE (rpge), GM (rpm), IBM (rpibm), Microsoft (rpmsft), and Mobil-Exxon (rpxom), and on the risk associated with the market portfolio (mpr). The 132 observations run from January 1998 to December 2008 (a) Estimate the model for each firm and present your results compactly in the form of a table (See below). You will have a total of six regressions, one for each firm. (6 points) Just type six regression commands one after the other in Stata, reg rpdis mpr reg rpge mpr and so on for the four remaining companies (6) Comment on the estimated beta values. Which firms appear aggressive? Defensive? (4 points) Table for Reporting Regression Results The numbers for Disney given below are fictitious and meant only for illustrative purposes. Estimates of the CAP Model Variable Disney Microsoft GE GM IBM Mobil- Exxon 0.0253 Constant (a) mpr (b) 0.7645 0.43 n 132 The constante is the OLS estimate of aand b is the OLS estimate of
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