Capm Problem

Topics: General Motors, Pearson product-moment correlation coefficient, Rate of return Pages: 3 (539 words) Published: March 11, 2013
CAPM Project
1.
| T-bill| S&P 500| Microsoft| Dell| Exxon| GM| IBM| Ford| Average| 0.00351| 0.00838| 0.02632| 0.03673| 0.01284| 0.00725| 0.01069| 0.00690| SD| 0.00154| 0.03996| 0.10257| 0.15161| 0.04580| 0.09327| 0.08761| 0.09430|

2.
| T-bill| S&P 500| Microsoft| Dell| Exxon| GM| IBM| Ford| T-bill| 1.00000| 0.06922| 0.13241| 0.06114| 0.03865| -0.00266| 0.04134| -0.02359| S&P 500| | 1.00000| 0.54399| 0.43517| 0.45093| 0.44741| 0.54018| 0.50752| Microsoft| | | 1.00000| 0.52712| 0.13734| 0.12264| 0.46422| 0.22796| Dell| | | | 1.00000| 0.06558| 0.17795| 0.36041| 0.26893| Exxon| | | | | 1.00000| 0.20574| 0.25684| 0.24470| GM| | | | | | 1.00000| 0.27395| 0.56059|

IBM| | | | | | | 1.00000| 0.25477|
Ford| | | | | | | | 1.00000|

3.
a) Because T-bills are bonds issued by the U.S. government, they are virtually default free. Therefore, they have very low risk and returns on T-bills do not vary a lot over time and its standard deviation is small.

(b) Because Microsoft, Dell and IBM all belong to the same industry; therefore, events that affect that industry will have effects on these three companies as well. If Dell and IBM’s computers don’t sell well or the demand is low, Microsoft will sell less software. Therefore, all of the three companies tend to move together and the correlation coefficient between returns from investing into these stocks is high.

(c) GM and Ford belong to the same industry; therefore, they react in the same way to shocks to the Automobile industry. Events that affect that industry don’t not have to affect the technology stocks and vice versa. Therefore, correlation coefficients across Auto and Technology stocks are small. As a result, the returns of Ford are highly correlated with the returns of General Motors but not with the returns of Dell or IBM.

4.
a)
Company| Beta| Std of beta|...
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