Calculate monthly excess returns, Cost Accounting

In this exercise you will familiarize yourself with index models, beta and CAPM estimation. Download the spreadsheet data_question3.xlsx from Sakai and use the data contained therein to answer Question 3. Spreadsheet data_question3.xlsx contains monthly stock returns for AT&T, Ford, Google and Exxon Mobile. Additionally, it contains monthly returns on Treasury securities and a broad market index. Be careful to calculate monthly excess returns over Treasuries as this is what you will need for estimating single index models.

a)  In class we have discussed how index models can be  used to separate firm-specific risk and market risk inherent in a firm's expected returns. What is the analytical formula to separate a security's risk into market risk and firm specific risk?
 
b)  Using excess returns over Treasuries, estimate the beta coefficients for AT&T, Ford, Google and Exxon Mobile without running a regression model. Additionally, using your result from part (a) estimate the  standard deviation for each firm's expected return and estimate each  firm's market risk component and firm-specific risk component. (Again use excess returns over Treasuries) Use the Excel functions STDEV.S and COVARIANCE.S for this exercise. Tabulate your results in the write-up as follows:

c)  Describe and interpret your results in the single-index model sense. i.e. how each stock moves with the overall market and which stock is the riskiest for a diversified investor? How does beta relate to the market risk component and how does it relate to the firm specific component?
 
d)  Suppose you want to construct a portfolio consisting of AT&T, Ford, Google and Exxon that exhibits minimal movement with the overall market, i.e.  = 0. Using Microsoft Excel Solver calculate the weights such that  is minimized under the constraint

β = 0. (Use excess returns over Treasuries for your calculations). Break  up into market risk and firm-specific risk. Would you have eliminated all risk by only holding this portfolio of stocks?

Posted Date: 2/28/2013 6:02:53 AM | Location : United States







Related Discussions:- Calculate monthly excess returns, Assignment Help, Ask Question on Calculate monthly excess returns, Get Answer, Expert's Help, Calculate monthly excess returns Discussions

Write discussion on Calculate monthly excess returns
Your posts are moderated
Related Questions
Evaluate the discounted mean term (DMT) of a bond redeemable at $120 nominal in 15 years time with annual coupons of 7% (based on a nominal bond of $100) at interest rates of 6% ,

what is overhead cost classfication of cost overhead

The employees at Warren Manufacturing Company are unionized. As minimum requirements, the union members insist on keeping a work force of at least 300 workers, and accepting an hou

when one firm purchase other and take over its all assets.balance sheet of absorbed firm shows goodwill,should we goodwill as well?

Balance Sheet Classi?cations and Relationships: Shelley and Co. has the following balance sheet elements as of December 31, 2012. Land. . . . . . . . . . . . . . . . . . . . . .

Cost Accounting Cost accounting has been defined via many accounting scholars in different forums. There is no single watertight definition of cost accounting, however the var

In the beach city of Santa Barbara, California, there are seven bathing suit stores, each with the same schedule of costs and each facing an identical demand curve. Swim N Style is

Inventory, Supplies and Prepaid Expenses You can well understand the requirements for carrying inventory. So as to  carry  on operations unhindered we require to have sufficien

Explain:- Q Why is the statement of cash flows useful? Q. How is it possible for a company to suffer a net loss for a given year, yet produce a positive net cash flow from opera

The Cash Cycle: so as to deal with the problem of cash management we should have a concept about the flow of cash by a firm's accounts. The entire process of such cash flow is ide