Systematic Risk and CAPM (100 points)

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Systematic Risk and CAPM (100 points)
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.

  1. 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.
  2. 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.

 
DIS vs. SPY monthly return
 

  DIS
Mean 1.05%
S.D 5.01%
Sharpe 0.209241
Alpha -0.001924
Beta (slope) 1.169373
Beta (covariance/Variance) 1.169373

 
 
 
 
 

Regression Statistics                
Multiple R 0.689189392              
R Square 0.474982019              
Adjusted R Square 0.465929985              
Standard Error 0.03665288              
Observations 60              
                 
ANOVA                
  df SS MS F Significance F      
Regression 1 0.070493197 0.070493197 52.47240678 1.14E-09      
Residual 58 0.077919152 0.001343434          
Total 59 0.148412349            
                 
  Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept -0.001923736 0.005032864 -0.382234836 0.70368422 -0.011998109 0.008150637 -0.011998109 0.008150637
X Variable 1 1.169372517 0.161431168 7.24378401 1.14E-09 0.846232924 1.492512109 0.846232924 1.492512109

 
 
k=Rf+β(Rm=Rf)

  β average return
DIS 1.169373 14.81%  
SPY 1 12.72% 12.5%
Rf 0 0.3665%  

SML line

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