Calculate monthly excess returns, Cost Accounting

Assignment Help:

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?


Related Discussions:- Calculate monthly excess returns

Giardia, Place a prepared slide of Giardia first under tlie low power and t...

Place a prepared slide of Giardia first under tlie low power and then under the high power of the microscope and observe tlie followilig characters. i) Bilaterally symmetrical

What depreciation method, What depreciation method does Amazon use for prop...

What depreciation method does Amazon use for property and equipment? What is the range of useful lives for buildings and for fixtures and equipment? Do these useful lives make sens

Combined cash - bank account- cash book, The following is a summary of a ca...

The following is a summary of a cash book for the year ended 31 April 2012 Payments                                              $              Receipts

Advantage and disadvantages of zero based budgeting, Advantage and Disadvan...

Advantage and Disadvantages of Zero Based Budgeting Advantages 1. Resources allocation is more efficient. 2. Focus attention on values for money and makes clear relat

Prepare journal entries to record the budget, The budgeted and actual reven...

The budgeted and actual revenues and expenditures of Seaside Township for a recent year (in millions) were as presented in the schedule that follows: 1. Prepare journal entries

Calculation of deductions - wages department, Calculation of Deductions - W...

Calculation of Deductions - Wages Department A range of deductions are complete from gross earnings when computing the net payment because of the employee, that deductions may

Determine the direct materials cost variance, Question P A RT A ...

Question P A RT A Borrico ltd manufacture a single product and they had currently introduced a system of budgeting and variance analysis. The subsequent information i

Profit an economic profit, Johnson Farms owns valuable farm land that permi...

Johnson Farms owns valuable farm land that permits it to make wheat at a lower cost than its competitors. The company reports large profits every year on its accounting statements.

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd