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....

...
The Capital Asset Pricing Model commonly known as CAPM defines the relationship between risk and the return for individual securities. CAPM was first published by William Sharpe in 1964. CAPM extended “Harry Markowitz’s portfolio theory” to include the notions of specific and systematic risk. CAPM is a very useful tool that has enabled financial analysts or the independent investors to evaluate the risk of a specific...

...pricing model (CAPM)
Using the Capital Asset Pricing Model, we need to keep three things in mind. 1 there is a basic reward for waiting, the risk free rate. 2 the greater the risk, the greater the expected reward. 3 there is a consisted trade off between risk and reward.
In finance, It is used to determine a theoretically appropriate required rate of return of an asset, if that asset is to be added to an already well-diversified portfolio, given...

...CAPM is a model which enables investors to determine the expected return from a risky security. It observes the relationship between the risk of an asset (Mobil Oil) and its return. The model uses Beta as the main measure of risk. This model works under the following situations:
• In a perfectively competitive market where they are many price-takers’ investors, who have a small market share each.
• Investors behaviour is myopic...

...SHARPE’S PORTFOLIO THEORY
This model was developed by William Sharpe. According to Sharp’s model, the theory estimates the expected return and variance of indices which may be one or more and are related to economic activity. This theory has come to be known as Market Model.
Sharpe’s single indexmodel will reduce the market related risk and maximize the returns for a given level of risk. Sharpe’s model...

...Chapter 8 IndexModels 163 Multiple Choice Questions 1. As diversification increases the total variance of a portfolio approaches ____________. A 0 B 1 C the variance of the market portfolio D infinity E none of the above Answer: C Difficulty: Easy Rationale: As more and more securities are added to the portfolio unsystematic risk decreases and most of the remaining risk is systematic as measured by the variance of the market portfolio. 2. The index...

...Is CAPM Beta Dead or Alive? Depends on How you Measure It
Jiri Novak*
* Uppsala University, Sweden E-mail: jiri.novak@fek.uu.se October 2007 Abstract: The CAPM beta is arguably the most common risk factor used in estimating expected stock returns. Despite of its popularity several past studies documented weak (if any) association between CAPM beta and realized stock returns, which led several researchers to proclaim beta “dead”. This paper shows...

...CAPMCAPM provides a framework for measuring the systematic risk of an individual security and relate it to the systematic risk of a well-diversified portfolio. The risk of individual securities is measured by β (beta). Thus, the equation for security market line (SML) is:
E(Rj) = Rf + [E(Rm) – Rf] βj
(Equation 1)
Where E(Rj) is the expected return on security j, Rf the risk-free rate of interest, Rm the expected return on the market portfolio and βj the...

...estimated to testify that the CAPM works in practice.
The capital asset pricing model (CAPM) provides us with an insight into the relationship between the risk of an asset and its expected return. This relationship serves two significant functions. First, it provides a benchmark rate of return for evaluating possible investments. Second, the model helps us to make an educated guess as to the expected return on asset that have not yet...

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