Tag: CAPM

What kind of information do you find valuable in CAPM to guide you in assessing the risk of LGI compared to other firms and the market in general?

Project 5 Report
Questions

How would you assess the evolution of the capital structure of LGI? Reflecting on your work in Project 1, would you consider the risk exposure under control? If not, what are your recommendations?

[insert your answer here]

What kind of information do you find valuable in CAPM to guide you in assessing the risk of LGI compared to other firms and the market in general?

[insert your answer here]

Identify and differentiate the stakeholders of LGI and explain how each one should perceive and weigh the risk and/or return of the firm.

[insert your answer here]

Would you consider the investment made in Project 4 optimally financed considering the proportion of debt that is bearable by LGI? How did the current WACC in Project 5 depart from the state of the firm in Project 1?

[insert your answer here]

If you had to advise a potential investor interested in having a minority stake in LGI, what kind of information would you provide to help the investor make a decision? Would you be bullish or have reservations? Support your answer with facts and data from all MBA 620 projects as well as your budget projections.

[insert your answer here]

What is the fee (as a percentage of the investment in your fund) you could charge your client to make them indifferent between investing in your fund or the index fund?

FINANCIAL ECONOMICS

Download the data from Canvas and calculate the (arithmetic) average excess returns for the five risky portfolios during the period 1/1927-12/1963.

Calculate the betas of the five portfolios during 1/1927-12/1963. Use the SLOPE func- tion in Excel that computes the slope coefficient βi of a linear regression Ri − Rf = αi + βi (Rm − Rf ) + εi

Calculate the alphas of the five portfolios during 1/1927-12/1963 using the INTERCEPT function in Excel. (The intercept is, by definition, the alpha.)

Calculate the expected excess returns predicted by CAPM for this period. According to the CAPM equation we should have E[Ri] − Rf = βi (E[Rm] − R).

Compute this for all five portfolios, including the market portfolio. (You can take the average excess return of the market portfolio from step 1 as your estimate of the expected excess market return.)

Plot the security market line predicted by CAPM, as well as the actual position of the five portfolios in (beta, expected excess return) space.

Provide tables reporting the mean excess return, beta, alpha, and the CAPM predicted excess return for the five portfolios. Round the numbers to three decimal places. For each of the two time periods you should have a completed table as below: [25 pts]
Table 1: CAPM test
Small Big
Low High Low High Market
mean excess return
beta
alpha
CAPM pred. excess return 2

Provide graphs of the security market line and the actual position of the five portfolios for both time periods. [25 pts]

Provide a brief comment on the difference between the CAPM predicted mean excess returns and the actual mean excess returns in the two periods. You can also do this comparison by looking at the magnitude of the alphas (which represent the difference between the predicted and actual mean excess returns).

Compare the two time periods:  does CAPM hold in either period? [5 pts]

Which portfolio has the highest alpha? Provide a brief comment. [10 pts]
Q2. Portfolio choice [35 pts]

Suppose you are a fund manager, managing an active fund with an expected return of 16% and a standard deviation of 25%. There is also an index fund tracking the FTSE 100, which has an expected return of 12% and a standard deviation of 20%. The risk-free rate is 4%.

Calculate the Sharpe ratio of your active fund and the index fund. Compare the ratios and provide an interpretation in no more than four sentences. [10 pts]

Your client has 75% of their wealth invested in your fund and the remaining 25% in the risk-free asset. They consider switching their risky investment to the index fund.

Calculate the expected return and the risk (standard deviation) of a portfolio with 75% invested in the index fund and 25% in the risk-free asset. [5 pts]

Suppose your client does not want to exceed the risk level found in part

Calculate the maximum expected return that they can achieve under this condition by combining your fund with the risk-free asset. What portfolio allocation (i.e., what combination of the risk-free asset and one of the risky funds) should your client choose? [10 pts]

What is the fee (as a percentage of the investment in your fund) you could charge your client to make them indifferent between investing in your fund or the index fund?

Why might the fund management be interested in diversification into emerging markets? Are they right to recommend such a diversification?

Individual Task Based Investment Project

Detailed problem description

Why might the fund management be interested in diversification into emerging markets? Are they right to recommend such a diversification? Answer these questions citing some empirical evidence.

Obtain monthly total return index data for the following 5 equity markets indexes, in US dollar terms, for the 5-year period from October 2016 to September 2020 (the names of the corresponding indices provided in parentheses), plus two financial asset indexes f your choices: (Bonds, Commodities, Derivatives, Cash indexes etc)

US (MSCI USA)

Europe (MSCI EUROPE U$)

Japan (MSCI JAPAN U$)

Pacific, excl. Japan (MSCI PACIFIC EX JP U$)

Latin America (MSCI EM LATIN AMERICA U$)

Index 1

Index 2

Compute monthly returns for each series. Obtain the current US risk-free rate of interest.1 Compute the mean and standard deviation of each series and the variance-covariance matrix. Obtain monthly total return index for the US dollar-based MSCI World equity index (MSCI WORLD U$) and compute its returns.3- In order to estimate expected returns, you decide to use the CAPM. Estimate the beta of the six indices listed above with respect to the MSCI All Country index. Use these estimates of beta in order to compute the CAPM expected return of these 7 indices.

Compute the efficient frontier for (i) the first three markets (i.e. US, Europe, Japan) and (ii) all the 7 markets considered. Assume that investors can borrow and lend at the risk free rate of interest and that they are able to take short positions. How does diversification into emerging markets or other assets affect the efficient set?

In the light of existing empirical evidence and your own findings, what are your recommendations? Should the fund expand on emerging markets, consider new assets or focus to its current strategy.

Suppose that your fund is not allowed to take short positions in any of the markets. How would such a restriction affect the conclusion you have drawn in Questions 4 and 5?

Critically reflect on the limitations of your analysis.

 

Choose a public company (it can be the same one you used for last homework) and calculate its r_,_, and WACC.Calculate its beta by downloading its 1-year prices, and the market prices, compute daily returns and standard deviations/correlation, then use CAPM (_+×)

WACC assignment
Choose a public company (it can be the same one you used for last homework) and calculate its r_,_, and WACC.

For _, use the most recent financial statement (10-Q or 10-K) and do interest expense / total debt, or find the information in the notes section of 10Q/10K

Calculate its beta by downloading its 1-year prices, and the market prices, compute daily returns and standard deviations/correlation, then use CAPM (_+×)

Finally for WACC, find the market cap from Yahoo! Finance for its “E” and add up all of its debt for the “D”

Discuss the discrepancies between the computed and actual stock prices.What are the assumptions of capital market theory?What is a completely diversified portfolio?

Stock Valuation and CAPM

Compute beta of each stock using regression analysis. Use ordinary least squares regression with the market index return as the independent variable and the individual stock return as the dependent variable. Use data from 1/1/2000 – 1/1/2017.

Compute each stock’s required rate of return using the Capital Asset Pricing Model (CAPM) and beta from above.

Compute the intrinsic stock price using the Gordon Growth Model and the required rate of return.

Discuss whether the stocks are undervalued or overpriced.

Discuss the models used and their limitations, if any.

What are analysts’ opinions of the firm’s stock value?

Discuss the discrepancies between the computed and actual stock prices.

What are the assumptions of capital market theory?

What is a completely diversified portfolio?

How many stocks are usually needed to get a completed diversified portfolio?

How does systematic risk compare to unsystematic risk?

Compare and contrast the Capital Market Line with the Security Market Line.

How does fundamental analysis compare to technical analysis?

There are some studies that suggest that there are other factors besides beta that should be used to estimate expected returns. Name and describe some of these other factors.

Identify two or three good performance companies and justify the investment motivation for the industry and the companies

Financial investment analysis

Assignment task:

As a trainee analyst in a London investment company, you are tasked to conduct stock market performance analyses and produce a report to the investment manager to identify some key factors that affect share performance.

The investment manager is keen to make significant investment in companies and industries that thrive in the current COVID-19 market environment and ask you to do some research in this area.

You are to identify two companies in one industry that perform well under COVID-19 investment environment. In your report, include the following:

Identify two or three good performance companies and justify the investment motivation for the industry and the companies (suggested words: 200 words)

Through research and review, identify key factors that could affect share performance for the companies in that industry (suggested words: 800 words)

Construct regression model(s) to examine the effect of different factors on share performance, i.e. CAPM, Fama and French three factors model and five factors model, or other models you develop. See some journals listed in the Assignment Support folder under Module (suggested words: 600 words)

Data introduction and sample statistics covering the most five recent years using daily data (suggested words: 200 words)

Discuss findings, including the following regression analysis areas: (suggested words: 1000 words)
Regression results and the economic meaning of key coefficients

Compare and contrast the two companies, i.e. performance and key factors
Examine multicollinearity
Examine heteroscedasticity
Examine autocorrelation
Examine model specification errors
Examine stationary/nonstationary
Examine cointegration
Discuss volatility

Conclusion and make recommendation to the investment manager (suggested words: 200 words)
Additional information:

Financial information can be obtained from the OSIRIS(Links to an external site.) (Links to an external site.) database accessible through the to an external site or via Stock Exchange, annual reports, official company website or other professional resources.

Data can be collected from finance.yahoo.com, i.e. book-to-market ratio, price-earnings ratio, market capitalization, P/E ratio, and any other criterion that interests you.

You can find this information by choosing a company and then clicking on Statistics.

CAPM, Fama and French 3 factors and 5 factors data can be downloaded from Kenneth R. French – Data Library
https://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html (Links to an external site.)

Bank of England website provides statistical releases in the UK
https://www.bankofengland.co.uk/news/statistics