The Capm and the Index Model

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  • Topic: Modern portfolio theory, Investment, Expected return
  • Pages : 2 (598 words )
  • Download(s) : 109
  • Published : April 8, 2013
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The CAPM and the Index Model report

Introduction

In this report, our group considers four large U.S. corporations, which are Apple, Dell, Nike and Home depot. By using the CAPM and the index model to analyze these four stocks and diversification, we collect data source over the period January 2008 to December 2012 from yahoo finance and process it to show a brief summary below:

Over the period January 2008 to December 2012, we calculate the returns for each corporation each month by using the monthly price of each corporation. After using the same method to calculate the market return and T-bill return, we find that the monthly average return for the market index is 0.10%, which is higher than the monthly average return for T-bills of 0.03%. Comparing with four large U.S. corporations, only Dell has a negative monthly average return. Also comparing each corporation with the market return, we can see that when the market moves, all four corporations tend to move in the same direction, but Apple and Dell have greater amounts while Nike and Home Depot have lower amounts. That means both Apple and Dell have a higher volatility than the market; however, Nike and Home Depot have a lower volatility than the market. By using the index model regression, also we can prove this conclusion by comparing the Beta. In addition, according to the four index model regressions, we find several significant estimation results. Dell has the highest correlation with the index. Also Dell has the highest R Square of 0.44, which means 44% of the variance of Dell’s excess returns is explained by the variation in the excess returns of the index. Other three corporations of R Square are much similar but a little lower than Dell. For another key variable of alpha, which indicates whether the security is a good or bad buy, these four corporations has the different numbers but only Dell has a negative number comparing with other three corporations....
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