Discussion Question 1 - (CLOs covered : 1) a. What is beta? How much is the beta
ID: 1170156 • Letter: D
Question
Discussion Question 1 - (CLOs covered : 1)
a. What is beta? How much is the beta of the market?
b. Choose one of the major financial securities indicators as the market. Provide the annual closing price of this indicator in the last 21 years. Based on this data calculate the annual rate of return of the indicator during the last 20 years.
c. Estimate the expected annual rate of return and the standard deviation of the rate of return of the index.
d. Find the risk free rate of return as the annual coupon rate on US treasuries.
e. Choose the rate of return of one of the securities you included in PA1, and re-state annual rates of return.
f. Find the beta of the security based on the ratio of standard deviations.
g. Find the beta of the security by linear regression.
h. Compare the two betas you calculated above. How these betas compare with beta of this security given by Yahoo Finance?
i. Based on findings in c and d find the market risk premium.
j. Based on your findings in d, f, and i find the required expected annual rate of return of the security.
k. Based on your findings in d, g, and i find the required expected annual rate of return of the security.
l. How the values found in j and k compare with the estimate of the actual expected rate of return you found in PA1?
Please provide complete answers to all questions. Include the theoretical framework in your write up. Explain your work in detail. Paste results from Excel. Paste the Excel formulae that you have used for calculations. Cite in-text references, and list the references in the standard format. Your citations should include source of data.
1 SUMMARY OUTPUT WMT rate of return Regression Statisties A Multiple R 5 R Square 6 Adjusted Sqarr 0.647448783 0.419189927 0.385024628 0.218414919 19 120% Standare Error 8 observations 10 ANOVA 12 Rcgression 13 Residual 14 Total $S 0.585315759 0.81098G304 MS 0.595315759 0.047705077 12.2694618 0·C02727558-40% 17 18 60% Stondard Erre Slut 1.206820337 3.502779582 Lower 95 Upper 95% Luwe, g5.c% Uppe, 95.0% 17 Intercept 18 Variable 1 20 0.068512496 0.923418055 0.052831139 0.26362 368 0.212019292 0.002727558 -0.C42951455 0.36721925 0.179976457 1.47961685 -0.042951465 0.367219256 0.173976457 Note that beta as evaluated by rcEression is 0.9234, which is significantly different than the beta that we obtained by the 1st method Huwever, lhe interestinE lhing is lhal Lh? coefficient oIX (estimated bela) ís significant regression In technical terms, it means that even though the sample size is small, but dependence of rate of return of WMT on market rate of return is strongly apparent since the coefficient of X in regression turns out to be significant. 23 24 25 26 27Explanation / Answer
Date
Close
12/31/1997
970.429993
12/31/1998
1229.22998
12/31/1999
1469.25
12/29/2000
1320.280029
12/31/2001
1148.079956
12/31/2002
879.820007
12/31/2003
1111.920044
12/31/2004
1211.920044
12/30/2005
1248.290039
12/29/2006
1418.300049
12/31/2007
1468.359985
12/31/2008
903.25
12/31/2009
1115.099976
12/31/2010
1257.640015
12/30/2011
1257.599976
12/31/2012
1426.189941
12/31/2013
1848.359985
12/31/2014
2058.899902
12/31/2015
2043.939941
12/30/2016
2238.830078
12/29/2017
2673.610107
Annual Return=((2673.610107-1229.22998)/1229.22998)^1/20
=0.809%
Expected Annual Return:-2673.610107(1.00809)
=2695.2396
Standard Deviation:-(Sum(Observations-Mean)/(No of observations-1))^0.5
Date
Close
CLOSE-Mean
Sq
12/31/1998
1229.22998
(237.21)
56,270.26
12/31/1999
1469.25
2.81
7.88
12/29/2000
1320.280029
(146.16)
21,363.76
12/31/2001
1148.079956
(318.36)
101,355.35
12/31/2002
879.820007
(586.62)
344,127.13
12/31/2003
1111.920044
(354.52)
125,686.88
12/31/2004
1211.920044
(254.52)
64,782.19
12/30/2005
1248.290039
(218.15)
47,590.93
12/29/2006
1418.300049
(48.14)
2,317.79
12/31/2007
1468.359985
1.92
3.67
12/31/2008
903.25
(563.19)
317,186.92
12/31/2009
1115.099976
(351.34)
123,442.27
12/31/2010
1257.640015
(208.80)
43,598.90
12/30/2011
1257.599976
(208.84)
43,615.62
12/31/2012
1426.189941
(40.25)
1,620.35
12/31/2013
1848.359985
381.92
145,860.20
12/31/2014
2058.899902
592.46
351,004.59
12/31/2015
2043.939941
577.50
333,502.14
12/30/2016
2238.830078
772.39
596,581.02
12/29/2017
2673.610107
1,207.17
1,457,251.21
29328.87005
0
4,177,169.05
Mean :-29328.87005/20
=1466.443503
SD=(Sum of Sq observation/N-1)^0.5
=(4177169.05/19)^0.5
=468.88
4. If risk free rate of reture is coupon rate then, then we are investing in bond, not stocks
Date
Close
CLOSE-Mean
Sq
12/31/1998
1229.22998
(237.21)
56,270.26
12/31/1999
1469.25
2.81
7.88
12/29/2000
1320.280029
(146.16)
21,363.76
12/31/2001
1148.079956
(318.36)
101,355.35
12/31/2002
879.820007
(586.62)
344,127.13
12/31/2003
1111.920044
(354.52)
125,686.88
12/31/2004
1211.920044
(254.52)
64,782.19
12/30/2005
1248.290039
(218.15)
47,590.93
12/29/2006
1418.300049
(48.14)
2,317.79
12/31/2007
1468.359985
1.92
3.67
12/31/2008
903.25
(563.19)
317,186.92
12/31/2009
1115.099976
(351.34)
123,442.27
12/31/2010
1257.640015
(208.80)
43,598.90
12/30/2011
1257.599976
(208.84)
43,615.62
12/31/2012
1426.189941
(40.25)
1,620.35
12/31/2013
1848.359985
381.92
145,860.20
12/31/2014
2058.899902
592.46
351,004.59
12/31/2015
2043.939941
577.50
333,502.14
12/30/2016
2238.830078
772.39
596,581.02
12/29/2017
2673.610107
1,207.17
1,457,251.21
29328.87005
0
4,177,169.05
Mean :-29328.87005/20
=1466.443503
SD=(Sum of Sq observation/N-1)^0.5
=(4177169.05/19)^0.5
=468.88
3.
Date
Close
12/31/1997
970.429993
12/31/1998
1229.22998
12/31/1999
1469.25
12/29/2000
1320.280029
12/31/2001
1148.079956
12/31/2002
879.820007
12/31/2003
1111.920044
12/31/2004
1211.920044
12/30/2005
1248.290039
12/29/2006
1418.300049
12/31/2007
1468.359985
12/31/2008
903.25
12/31/2009
1115.099976
12/31/2010
1257.640015
12/30/2011
1257.599976
12/31/2012
1426.189941
12/31/2013
1848.359985
12/31/2014
2058.899902
12/31/2015
2043.939941
12/30/2016
2238.830078
12/29/2017
2673.610107