Fundamentals Data Collection Graphing Rates of Return Regression CAPM

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Financial Modeling Fundamentals Data Collection Graphing Rates of Return Regression CAPM.

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Presentation transcript:

Fundamentals Data Collection Graphing Rates of Return Regression CAPM Financial Modeling Fundamentals Data Collection Graphing Rates of Return Regression CAPM Vitex.xls

CAPM

Prepare Spreadsheet New worksheet Label it CAPM Data R(MVP) + … CAPM …

Prepare Spreadsheet Relay data from Returns tab Rule #3: Always color code. Relay data from Returns tab =Returns!B$42 =R(BRK-b)!J1 =Returns!G$42 =R(MVP)!J1

Security Market Line Relay Estimated Beta's from the several regressions in the model All my betas are less than 1.0 so I want to allow the user to extend the SML for a more professional looking graph

Security Market Line Calculate Annual Returns © Oltheten & Waspi 2012

Security Market Line E[R] = Rf + β (RM – Rf) Rf RM β © Oltheten & Waspi 2012

Security Market Line Beta = 0.572 implies we deserve a return of -5.420% in this market. But the return on BRK-b was 6.650%: 12.070% more than we could have expected for this level of market risk. © Oltheten & Waspi 2012

Graph

Security Market Line Create an XY (Scatter) X axis is β Y axis is E[R] Observed Annual Calculated by the CAPM

Security Market Line Excel default chart Edit data series Observed Annual to marker only Edit data series Calculated to line only

Security Market Line Add data labels

Abnormal Returns Select data series Observed Returns and add Error Bars

Abnormal Returns set error bars to abnormal returns Don't Panic Custom Error Bars Positive Error Value Negative Error Value =CAPM!$H$4:$H$9 OK Cancel Don't Panic

Abnormal Returns Excel defaults to both horizontal and vertical error bars. Select and delete the horizontals

Capital Asset Pricing Model Our diversifying stock, Eli Lilly, had negative abnormal returns. We picked the wrong company. © Oltheten & Waspi 2012

CAPM