Capital asset pricing model

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Capital asset pricing model (CAPM) is a widely accepted, though controversial, theory of asset pricing in the capital market. According to CAPM, the expected return of any asset in the capital market is a linear function of the expected return on the whole market and the expected return of the risk-free rate. Mathematically, the model is stated as per Equation 1:
E(Re) = E(RFR) + β *E(Rm – RFR)

Where E(Re) is the expected rate of return on a specific asset, E(RFR) is the expected risk-free rate, β is the sensitivity of the stock return with respect to the overall market return, and E(Rm – RFR) is the expected capital market risk premium.

Empirical verification of CAPM is done by running a regression model of historical returns of stocks against historical returns of the overall market.

In this CLA 2 assignment, your professor will assign you the stock of a publicly traded company to conduct the following:
1. Download the stock’s last 10 years monthly price history from yahoo finance or other sources.
2. Select a broad stock market index, such as the S&P 500 Index or the Russell 3000 Index, etc. and download its last 10 years of monthly price history.
3. Use the adjusted closing prices of the stock and the index and calculate the monthly rate of return of each.
4. Consider the stock’s monthly return as the dependent variable and the index’s monthly return as the independent variable and run the following regression model:
Re = α + β*Rm + ε

Where Re is the realized monthly rate of return of your stock, Rm is the realized monthly rate of return on the overall capital market, and ε is the error term.
5. After estimating the regression coefficients of equation (2) through the ordinary least squares (OLS) method, conduct a test of hypothesis and determine if the estimates of α and β are statistically significant at the 5% level and report their t statistics and p values.
6. Determine if the F value for the correlation coefficient is statistically significant at the 5% level.
7. What is your interpretation of the R-square value? Explain to what extent your regression estimates can predict future return of your stock against your index’s movements.
8. What is the estimate of RFR?
9. Calculate the value of the error term for each year and construct the histogram of the error terms.
10. Using the Explore feature in SPSS (in Excel: Data Analysis, Regression, Normal Probability Plots), conduct a test for normality of the error terms and exhibit the normality plot.
11. Does the result of the test for normality of the error terms affect the validity of your regression model? Explain.
12. Present an APA-formatted write-up of your finding in one paragraph.

 

 

Sample Solution

Martin struggles to find a way to be meaningful to his wife without controlling her. Much of Martin’s speech, including the aforementioned quote comes in the form of long lecture-like monologues that depict him as relatively egotistical–impossibly consumed in the confusion of finding his own identity, but still demanding that Victoria find hers. David Waterman also insists that the characters in the second act are free of social control, however noting that “for all of their apparent freedom to perform their genders as they see fit, the characters in Act Two are obviously not emancipated from the matrix of power and its normative, regulatory function of maintaining social control” (91). While in Act I, Victoria is forced into an ultimate submission, in Act II, Victoria faces a new sort of constraint. She is no longer a dummy, but the nature of her relationship with Martin is restricting in a different, far more subtle manner. Martin, although to all intents and purposes is evidently in favor of Victoria’s liberation, manages to exert control by making her feel guilty for not responding positively to his attempts to satisfy her sexually. Only through a homosexual relationship with Lin can Victoria find a balance between love and liberation.

It is obvious that Act II is a significant improvement in terms of the freedom and independence the characters experience. However, there are still rather subdued indications of an underlying influence of the earlier instituted Victorian social standards. The most obvious exhibition of the continued effects we suffer under is the drastic distinction instituted between the male and female gender, and the specific traits attributed to them each. While the characters attempt to overpower the characteristics that have always been assigned to their gender, there are still specific obdurate characteristics that they continue to assign to the subsequent gender. Females are still associated with delicate frocks, playing with dolls, and caring motherhood, while males are connected with violence, force, and control. It may prove to be difficult to completely dissociate ourselves from the institutions we have so long internalised, as there has never been a time when our society had retained neutral connotations associated to the individualised genders. One must wonder how or even if our society will ever transcend beyond the restrictions of such classifications.

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