Reference no: EM132425832
Assignment
Question 1. CAPM versus Fama and French 3-factor Model
A. CAPM
Select a company from the S&P 500 index. Download monthly adjusted closing prices from the Bloomberg Terminal for S&P 500 and the company over the period January 2007 -December 2017. For the same period download the monthly excess return on one-month T-bills from Professor Kenneth French's website
Once the data are obtained perform the following steps:
a) (i) Calculate the log returns and the excess return for S&P 500 and the company (You may wish to recreate the table headings below):
Monthly Returns Excess Returns
|
Date
|
S&P 500
Adj Close
|
Company
Returns
Adj Close
|
S&P 500
Returns
|
Company
Returns
|
Risk Free Rate
|
S&P 500 returns
-
Risk Free Rate
|
Company returns - Risk-free rate
|
(ii) Obtain beta by regressing the company's excess returns against those of S&P 500 (Include a table of your results).
(iii) Discuss your regression results and its implications on investing in the index as opposed to the company. Your discussion should include the effect of the financial crisis (November 2007 - May 2009).
b) (i) Create a graph of the Security Market line (SML);
(ii) What does the SML graph tell you about the mean-beta relationship?
B. FAMA AND FRENCH 3-FACTOR MODEL
Using all the previous data downloaded from Professor Kenneth French's website, perform the following steps:
a) (i) Merge the previously calculated company excess returns with the Fama and French factors (You may wish to recreate the table below). Then regress the company's excess returns against the Fama and French factors.
Date
|
Company - Risk Free Rate
|
Mkt-RF
|
SMB
|
HML
|
RF
|
(ii) Discuss your regression results and compare it to the CAPM results.
b) Using relevant literature, critically analyse the validity of CAPM and the Fama and French three factor model. Your discussion should include underlying assumptions, implications, and practical applications.
Attachment:- CAPM versus Fama and French 3-factor Model.rar
What is Micro Advantage weighted-average cost of capital
: The expected after-tax market return on the firm's common equity is 15%. What is Micro Advantage's weighted-average cost of capital (WACC)
|
Determine the necessary average annual income
: Determine the necessary average annual income (using straight-line depreciation) that must be achieved on this project for it to be acceptable to Harris Co
|
Determine the net present value
: The present value of $1 at compound interest of 12% for 1, 2, 3, and 4 years is 0.893, 0.797, 0.712, and 0.636, respectively. Determine the net present value
|
Difference between modifiers used for hospital outpatients
: Discuss the difference between modifiers used for hospital outpatients versus modifiers for physicians. Why are they used?
|
Calculate the log returns and the excess return
: Create a graph of the Security Market line - What does the SML graph tell you about the mean-beta relationship and Discuss your regression results.
|
How are the myths of cybele and attis
: How are the myths of Cybele and Attis similar to that of Demeter and Persephone?
|
Determine the average rate of return on investment
: The company's minimum desired rate of return is 12%. Determine the average rate of return on investment, giving effect to depreciation on the investment
|
Effective-ineffective listening
: Think of a person whom you perceive to be an EFFECTIVE listener. List three of this person's "listening" qualities (including real or perceived attitudes
|
General news articles-political news and culture news
: The articles must be related to investments, so please avoid general news articles, political news, culture news, opinion pieces not related to finance
|