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The CAPM relates the sensitivity of an individual company's stock returns to the returns of the market as a whole. Estimating such a model for
The CAPM relates the sensitivity of an individual company's stock returns to the returns of the market as a
whole. Estimating such a model for a particular firm requires data on the market rate of return typically a
composite index such as the S&P the riskfree rate of return usually a shortterm Treasury bill and
stock returns from the company of interest. The data for this assignment consists of monthly observations
from January through December on the market return RM the riskfree rate RF and the
return on the York Corporation's common stock RY
Using Excel, we create two new variables, RYORK RYRF and RMKT RMRF that correspond
to the risk premiums for the YORK Corporation and the market, respectively.
Plot the risk premium of the York Corporation's common stock RYORK against the risk premium of the
market RMKT Do you have graphical evidence that the return on the York Corporation's common stock
RY and the risk premium of the market RMKT have a linear relationship?
Regress the risk premium of the York Corporation's common stock RYORK on a constant and the risk
premium of the market RMKT What is the beta of the assets of the firm.
The YORK corporation stock is mispriced if the estimate of the intercept in the regression in is statistically
different from zero. Explain why the intercept is expected to be zero if the CAPM holds.
The R measures the proportion of the total variation of a dependent variable Y explained by the regression
of Y on the independent variable, X What is the percentage of the variance in the excess returns on YORK
corporation due to the excess returns on the market?
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