Systematic Risk and CAPM
Systematic Risk and CAPM
Company: Apple. Inc
Purpose of this project is to calculate the systematic risk (β) of your company, and therefore to estimate the required rate of return (k) using CAPM.
A. The calculation should rely on at least 60 monthly (or 250 weekly) returns on your company’s stock and on the market (S&P 500 Index, for example). A regression line should be built on Excel and a graph of the characteristic line (SCL) should be provided. A short interpretation on β value and characteristic line should be given too.
B. You should build your own security market line (SML). Explain your calculation for the annual risk free rate and the annual market return. The required return (k) should be visible on the graph and its value should be supported by calculation.
Do not forget to provide in appendices:
• The table showing prices and returns you use to calculate β and to build the characteristic line
• A graph showing characteristic line and β
• A graph showing the SML, the risk free rate, the market return, and your company required return k.
Solution Preview
- From the regression analysis based on the 60 monthly returns for a period of between 31st December 2010 and 31st December 2015, the following regression equation was obtained;
Excess return(apple) = -1.415815144RMRF + 4.266412595.
Based on the equation above, Our Beta (B) is -1.415815144 and the intercept are 4.266412595 which is the abnormal return or excess return during this period.
(341 words)