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AFM273 Chapter Notes - Chapter 10: Confidence Interval

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lemonbeetle804
26 Jun 2018
School
University of Waterloo
Department
Accounting & Financial Management
Course
AFM273
Professor
Kenneth Vetzal

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Chapter 10
Variance (R): ΣR PR * (R – E[R])2
Standard Deviation: (Var(R))1/2
Variance (R): 1/(T-1) * Σ (R – Ravg)2
Standard Error: SD/(# of observations)1/2 = volatility/(# of returns)1/2
95% Confidence Interval: Avg Return +/- 2(Standard Error)
Beta: The expected percent change in the excess return of a security for a 1%
change in the excess return of the market portfolio.
Market Risk Premium = E[RMk t ] - rf
E[ri] = Risk-Free Rate + Risk Premium = r f + Bi * (E[RM k t ] – rf)
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Related Questions

If CAPM is valid, which of the following situations are possible? Explain. Consider each situation independently. Hint: recall that the CAPM has implications for expected returns, correlations, covariances and variances.

a) Portfolio A - Expected Return =20, Beta=1.4

Portfolio B - Expected Return =25, Beta=1.2

b) Portfolio A - Expected Return =30, SD=35

Portfolio B - Expected Return =45, SD=25

c) Portfolio Rf - Expected Return =10, SD=0

Portfolio Market - Expected Return =18, SD=24

Portfolio A - Expected Return=16, SD=12

d) Portfolio Rf - Expected Return =10, SD=0

Portfolio Market - Expected Return =18, SD=24

Portfolio A - Expected Return=20, SD=22

e) Portfolio Rf - E(r)=10, Beta=0

Portfolio Market - E(r)=18, Beta=1

Portfolio A - E(r)=16, Beta=1.5

f) Portfolio Rf - E(r)=10, Beta=0

Portfolio Market - E(r)=18, Beta=1

Portfolio A - E(r)=16, Beta=0.9

Please show me all the work, let me know what i need to do to solve this problem. I have no idea how to attack this problem

5. Consider the two (excess return) index-model regression results for stocks A and B. The riskfree rate over the period was 8%, and the market’s average return was 16%. Performance is measured using an index model regression on excess returns.

Stock A Stock B
Index model regression estimates 1% + 1.2(rM – rf) 2% + .8(rM – rf)
R-square 0.677 0.487
Residual standard deviation, σ(e) 12% 20.8%
Standard deviation of excess returns 23.3% 28.3%

Calculate the following statistics for each stock: (Round your answer to 4 decimal places. Omit the "%" sign in your response.)
Stock A Stock B
i. Alpha __________ %? _________ %?
ii. Information ratio __________ ? ________?
iii. Sharpe measure __________ ? ________?
iv. Treynor measure __________ ? ________?

5.. Consider the two (excess return) index-model regression results for stocks A and B. The riskfree rate over the period was 8%, and the market’s average return was 16%. Performance is measured using an index model regression on excess returns.
Stock A Stock B
Index model regression estimates 1% + 1.2(rM – rf) 2% + .8(rM – rf)
R-square 0.677 0.487
Residual standard deviation, σ(e) 12% 20.8%
Standard deviation of excess returns 23.3% 28.3%

Calculate the following statistics for each stock: (Round your answer to 4 decimal places. Omit the "%" sign in your response.)
Stock A Stock B
i. Alpha 1 % 2 %
ii. Information ratio ______? ______?
iii. Sharpe measure ______? ______?
iv. Treynor measure 8.8330 10.500

(((NUMBERS BELOW ARE NOT THE CORRECT ANSWERS)))

Information Ratio = Alpha/Standard deviation residual

For stock A, = 1/10.3 = 0.0971 For stock B, = 2/19.1 = 0.1047

Sharpe Measure = Excess returns / Standard deviation of excess returns

For stock A, = (1+1.2*(16-8))/21.6 = 0.4907 For stock B, = (2+0.8*(16-8))/24.9 = 0.3373