Question

In: Finance

The following six (4) questions are based on the following data: Year Rp Rm Rf 2000...

The following six (4) questions are based on the following data:

Year Rp Rm Rf
2000 18.1832 -24.9088 5.112
2001 -3.454 -15.1017 5.051
2002 47.5573 20.784 3.816
2003 28.7035 9.4163 4.2455
2004 29.8613 8.7169 4.2182
2005 11.2167 16.3272 4.3911
2006 32.2799 14.5445 4.7022
2007 -41.0392 -36.0483 4.0232
2008 17.6082 9.7932 2.2123
2009 14.1058 16.5089 3.8368
2010 16.1978 8.0818 3.2935
2011 11.558 15.1984 1.8762
2012 42.993 27.1685 1.7574
2013 18.8682 17.2589 3.0282
2014 -1.4678 5.1932 2.1712
2015 9.2757 4.4993 2.2694
2016 8.5985 23.624 2.4443

When performing calculations in the following problems, use the numbers in the table as-is. I.e., do NOT convert 8.5985 to 8.5985% (or 0.085985). Just use plain 8.5985.

1. Using the basic market model regression, R p = α + β R m + ϵ, what is the beta of this portfolio? Yes, this is an opportunity to practice regression analysis. You can use Excel or other tool of choice.

2. For precision, find the portfolio beta using the excess return market model:

R p − R f = α + β ∗ ( R m − R f ) + ϵ

[Hint: compute annual excess returns first, then run regression.]

3. Using the excess return beta β ∗ from the previous problem, what is Jensen's alpha for the portfolio?

[Hint: use Equation (17.6) from Moore (2015)]

4. What is the portfolio's M2 measure?

Solutions

Expert Solution

(1) Regression Analysis between Rp and Rm

SUMMARY OUTPUT
Regression Statistics
Multiple R 0.699678
R Square 0.489549
Adjusted R Square 0.455519
Standard Error 14.79791
Observations 17
ANOVA
df SS MS F Significance F
Regression 1 3150.173 3150.173 14.38578 0.001769
Residual 15 3284.673 218.9782
Total 16 6434.845
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 9.505086 3.906462 2.43317 0.02795 1.17866 17.83151 1.17866 17.83151
Rm 0.821598 0.216617 3.79286 0.001769 0.35989 1.283307 0.35989 1.283307

From the output of regression analysis between Rp and Rm, we get β=0.821598

(2) Regression Analysis between (Rp-Ef) and (Rm-Rf)

SUMMARY OUTPUT
Regression Statistics
Multiple R 0.706928
R Square 0.499748
Adjusted R Square 0.466397
Standard Error 14.71172
Observations 17
ANOVA
df SS MS F Significance F
Regression 1 3243.244 3243.244 14.98486 0.001508
Residual 15 3246.521 216.4347
Total 16 6489.764
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 8.947298 3.649684 2.451527 0.02696 1.168181 16.72641 1.168181 16.72641
Rm-Rf 0.806506 0.208344 3.871028 0.001508 0.362431 1.25058 0.362431 1.25058

From the Regression Analysis between (Rp-Ef) and (Rm-Rf), we get β=0.806506

(3) Jensen's α = Rp - [Rf + β*(Rm-Rf)]

(Rp)avg = 15.356

(Rf)avg = 3.438

(Rm-Rf)avg = 3.683

Jensen's α = 15.356 - [3.438 + 0.806506*3.683] = 8.947

(4) M^2 = (σm/σp)*(Rp-Rf) + Rf

M^2 = (17.078/20.054)*(15.356-3.438) + 3.438 = 13.587


Related Solutions

Year Rp Rm Rf 2000 18.1832 -24.9088 5.112 2001 -3.454 -15.1017 5.051 2002 47.5573 20.784 3.816...
Year Rp Rm Rf 2000 18.1832 -24.9088 5.112 2001 -3.454 -15.1017 5.051 2002 47.5573 20.784 3.816 2003 28.7035 9.4163 4.2455 2004 29.8613 8.7169 4.2182 2005 11.2167 16.3272 4.3911 2006 32.2799 14.5445 4.7022 2007 -41.0392 -36.0483 4.0232 2008 17.6082 9.7932 2.2123 2009 14.1058 16.5089 3.8368 2010 16.1978 8.0818 3.2935 2011 11.558 15.1984 1.8762 2012 42.993 27.1685 1.7574 2013 18.8682 17.2589 3.0282 2014 -1.4678 5.1932 2.1712 2015 9.2757 4.4993 2.2694 2016 8.5985 23.624 2.4443 When performing calculations in the following problems, use...
Year Rp Rm Rf 2000 18.1832 -24.9088 5.112 2001 -3.454 -15.1017 5.051 2002 47.5573 20.784 3.816...
Year Rp Rm Rf 2000 18.1832 -24.9088 5.112 2001 -3.454 -15.1017 5.051 2002 47.5573 20.784 3.816 2003 28.7035 9.4163 4.2455 2004 29.8613 8.7169 4.2182 2005 11.2167 16.3272 4.3911 2006 32.2799 14.5445 4.7022 2007 -41.0392 -36.0483 4.0232 2008 17.6082 9.7932 2.2123 2009 14.1058 16.5089 3.8368 2010 16.1978 8.0818 3.2935 2011 11.558 15.1984 1.8762 2012 42.993 27.1685 1.7574 2013 18.8682 17.2589 3.0282 2014 -1.4678 5.1932 2.1712 2015 9.2757 4.4993 2.2694 2016 8.5985 23.624 2.4443 When performing calculations in the following problems, use...
Year Rp Rm Rf 2000 18.1832 -24.9088 5.112 2001 -3.454 -15.1017 5.051 2002 47.5573 20.784 3.816...
Year Rp Rm Rf 2000 18.1832 -24.9088 5.112 2001 -3.454 -15.1017 5.051 2002 47.5573 20.784 3.816 2003 28.7035 9.4163 4.2455 2004 29.8613 8.7169 4.2182 2005 11.2167 16.3272 4.3911 2006 32.2799 14.5445 4.7022 2007 -41.0392 -36.0483 4.0232 2008 17.6082 9.7932 2.2123 2009 14.1058 16.5089 3.8368 2010 16.1978 8.0818 3.2935 2011 11.558 15.1984 1.8762 2012 42.993 27.1685 1.7574 2013 18.8682 17.2589 3.0282 2014 -1.4678 5.1932 2.1712 2015 9.2757 4.4993 2.2694 2016 8.5985 23.624 2.4443 When performing calculations in the following problems, use...
Year Rp Rm Rf 2000 18.1832 -24.9088 5.112 2001 -3.454 -15.1017 5.051 2002 47.5573 20.784 3.816...
Year Rp Rm Rf 2000 18.1832 -24.9088 5.112 2001 -3.454 -15.1017 5.051 2002 47.5573 20.784 3.816 2003 28.7035 9.4163 4.2455 2004 29.8613 8.7169 4.2182 2005 11.2167 16.3272 4.3911 2006 32.2799 14.5445 4.7022 2007 -41.0392 -36.0483 4.0232 2008 17.6082 9.7932 2.2123 2009 14.1058 16.5089 3.8368 2010 16.1978 8.0818 3.2935 2011 11.558 15.1984 1.8762 2012 42.993 27.1685 1.7574 2013 18.8682 17.2589 3.0282 2014 -1.4678 5.1932 2.1712 2015 9.2757 4.4993 2.2694 2016 8.5985 23.624 2.4443 When performing calculations in the following problems, use...
Ri = [Rf + ((Rm – Rf) x Bi)] Please define and explain the following components:...
Ri = [Rf + ((Rm – Rf) x Bi)] Please define and explain the following components: Ri Rf (Rm – Rf) Bi What does the CAPM tell us about the required return on a risky investment?
E(Rp) = 12%, Rf = 2%, Бp = 4, βp = 1.5 Find the Sharpe and...
E(Rp) = 12%, Rf = 2%, Бp = 4, βp = 1.5 Find the Sharpe and Treynor index.
Questions 4 through 10 that follow are based on the following December 31, 20X6 year-end account...
Questions 4 through 10 that follow are based on the following December 31, 20X6 year-end account balances for XYZ Co. after adjusting entries had been prepared but before the books were closed for the year.     Using the attached information, prepare the adjusted trial balance on December 31, 20X6, prepare the income statement for the year ended December 31, 20X6, Prepare the statement of retained earnings for the year ended December 31, 20X6, Prepare the statement of financial position as of December...
This article lists out six critical questions for the data analyst/user/presenter. Based on what you have...
This article lists out six critical questions for the data analyst/user/presenter. Based on what you have learned about inventory management, please create a hypothetical scenario in which you answer those questions for the CEO of your firm. My understanding of the business problem How I will measure the business impact What data is available The initial solution hypothesis The solution The business impact of the solution
Questions #(3) to # (4) are based on the following information. Clooney Inc. is considering a...
Questions #(3) to # (4) are based on the following information. Clooney Inc. is considering a new product that would require an investment of $15 million. If the new product is well received, then the project would produce cash flows of $10 million a year for 3 years, but if the market does not like the product, then the cash flows would be only $4 million per year. There is a 50% probability of both good and bad market conditions....
Consider the following data: Number of Deaths in the U.S. by Drug Overdose Year 2000 2001...
Consider the following data: Number of Deaths in the U.S. by Drug Overdose Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 Deaths 17,054 17,514 14,315 13,332 17,775 14,556 11,151 18,650 16,647 Step 1 of 2 : Find the two-period moving average for the year 2003. If necessary, round your answer to one decimal place.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT