6. The capital asset pricing model (CAPM) postulates that the mean return of each security (Y)...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
6. The capital asset pricing model (CAPM) postulates that the mean return of each security (Y) should be linearly related to its Beta (X2), a measure of systematic risk. A financial economist examined the following estimates on 10 stocks using theoretical and empirical model for mean stock return as; Yit =B1 + B₂X2it + B3Yit-1 + Uit AY₁=Y₁ + y2 X2it + Y3Yin-1 + Vit where uit and vit are identical and independent distribution disturbances. Stocks Mean Return (%) Mean Return (%) (t-1) 24 18 17 11.4 21 16.2 26 24 19 11 29 21 11 8 16 12 11 22 1 2 3 4 5 6 7 8 9 10 8 19 (1) (2) Beta 1.5 1.1 1.3 1.7 0.9 2.1 1.1 1.3 1.08 1.8 i) Construct a sample, estimate and average econometric models based on the theoretical models given. ii) What is the implication of Y₁-1 in both models? iii) What does model (2) imply in this case? Explain the y in the model. iv) Compute and test the expect least square estimates of models; B₁. B2 and B₁. Interpret your answers in each case. v) Compute the AY, and explain what it implies with respect to Y₁, 72, and Y3. vi) Determine the RSS, R², and Adjusted R²? Explain your answers in each case. vii) Why do we include stochastic error term in the econometric model? What does it represent in our case here? Is there any difference in u, and vie State the hypothesis and test the significance of the Beta (X2) and Yit-1. viii) ix) Construct and interpret a 95% confidence interval for all B 6. The capital asset pricing model (CAPM) postulates that the mean return of each security (Y) should be linearly related to its Beta (X2), a measure of systematic risk. A financial economist examined the following estimates on 10 stocks using theoretical and empirical model for mean stock return as; Yit =B1 + B₂X2it + B3Yit-1 + Uit AY₁=Y₁ + y2 X2it + Y3Yin-1 + Vit where uit and vit are identical and independent distribution disturbances. Stocks Mean Return (%) Mean Return (%) (t-1) 24 18 17 11.4 21 16.2 26 24 19 11 29 21 11 8 16 12 11 22 1 2 3 4 5 6 7 8 9 10 8 19 (1) (2) Beta 1.5 1.1 1.3 1.7 0.9 2.1 1.1 1.3 1.08 1.8 i) Construct a sample, estimate and average econometric models based on the theoretical models given. ii) What is the implication of Y₁-1 in both models? iii) What does model (2) imply in this case? Explain the y in the model. iv) Compute and test the expect least square estimates of models; B₁. B2 and B₁. Interpret your answers in each case. v) Compute the AY, and explain what it implies with respect to Y₁, 72, and Y3. vi) Determine the RSS, R², and Adjusted R²? Explain your answers in each case. vii) Why do we include stochastic error term in the econometric model? What does it represent in our case here? Is there any difference in u, and vie State the hypothesis and test the significance of the Beta (X2) and Yit-1. viii) ix) Construct and interpret a 95% confidence interval for all B
Expert Answer:
Related Book For
Statistics For Business Decision Making And Analysis
ISBN: 9780321890269
2nd Edition
Authors: Robert Stine, Dean Foster
Posted Date:
Students also viewed these accounting questions
-
The prior 4M exercise introduces the Capital Asset Pricing Model. The slope and intercept in this model have particularly important meaning, with b0 (known as alpha in finance) denoting the mean...
-
The capital asset pricing model (CAPM) contends that there is systematic and unsystematic risk for an individual security. Which is the relevant risk variable and why is it relevant? Why is the other...
-
The Capital Asset Pricing Model (CAPM) describes the relationship between returns on a speculative asset (typically returns on stock) and returns on the whole stock market. The underlying theory...
-
Hi, the task is to critically evaluated two or more types of market segmentation, and applied to own organisations customer base. The guidance says to start with a general explanation of the topic -...
-
Describe some schemes for identifying data at different levels. Why is it important to have such schemes?
-
A furniture making business manufactures quality furniture to customers? orders. It has three production departments and two service departments. Budgeted overhead costs for the coming year are as...
-
Determine if pretrial conferences are required or authorized in California. Are there special rules in California that must be followed?
-
Buhler Motor Company manufactures automobiles. During September 2012, the company purchased 5,000 head lamps at a cost of $10 per lamp. Buhler withdrew 4,650 lamps from the warehouse during the...
-
The Cost of Capital Explain the concepts underlying the firm's overall cost of capital and the purpose for its calculation.
-
Western Digital, a developer of storage devices and solutions, has grown dramatically since it was established in 1970. Based in San Jose, California, they employ more than 61,000 with locations...
-
Question 5c in the shape above match the profile 12 AB=6cm, AD=8om and angle BAE=12 radians AB and AE are radi of a circle with centre A and are BE AC and AD are rade of a crcle with centre A and are...
-
A circular current-carrying wire loop produces a magnetic field. A spinning disk of uniformly distributed charge produces a similar magnetic field. How would you expect the field due to a spinning...
-
Earth's magnetic field is thought to be generated by currents in the planet's core. In what direction (clockwise or counterclockwise, when viewed along the rotation axis from north to south) does...
-
An opinion column in the Wall Street Journal argued that Americans enjoy comparative advantages in [service] sectors such as construction and engineering, but global trade in services is weighed down...
-
A flat conducting plate is centered in the \(x y\) plane of an \(x y z\) coordinate system in which the \(x y\) plane is horizontal. A bar magnet is lowered vertically toward the plate. If the magnet...
-
In the space surrounding Earth, the main component of the planet's magnetic field is the field due to a magnetic dipole. In what direction is Earth's magnetic dipole moment?
-
What are the extraordinary gains or losses if any? Explain https://www.annualreports.com/HostedData/AnnualReports/PDF/NASDAQ_AMZN_2022.pdf
-
Refer to Exercise 8.S.I. Construct a scatterplot of the data. Does the appearance of the scatterplot indicate that the pairing was effective? Explain. Exercise 8.S.I. A volunteer working at an animal...
-
Find these probabilities for a standard normal random variable Z. Be sure to draw a picture to check your calculations. Use the normal table in the back of the book or software. (a) P (Z < 1.5) (b) P...
-
Using the data from Exercise 57, consider the total revenue per employee. Revenue is in millions of dollars, and the count of employees is given in the data table. (a) Why are there fewer than 428...
-
A chain of fast-food restaurants offers an instant-winner promotion. Drink cups and packages of French fries come with peel-off coupons. According to the promotion, 1 in 20 packages is a winner. (a)...
-
The audit procedures applied to accrued liabilities differ from those applied to accounts payable because a. Accrued liabilities balances are less material than accounts payable balances. b. Evidence...
-
Match each assertion to the related audit objective. Each assertion may be used once, more than once, or not at all. Audit objective 1. To determine whether the amount shown as invento- ries in the...
-
Audit procedures should be designed to accomplish specific audit objectives. Review the following inventory audit procedures and indicate which audit objectives are being accomplished and how. a....
Study smarter with the SolutionInn App