1. Financial Modeling Data Collection & Integration Graph Rates of Return
Efficient Portfolio Frontier
Regression
CAPM
Vitex.xls

2. Market Model: Regression

3. Prepare Spreadsheet New worksheet Label it R(BRK-b) Data Returns +
Candlestick
R(BRK-b)

4. Prepare Spreadsheet
Relay data from Returns tab

5. Reference the cell by either H3 or RR
Names
Name cells
Cell’s name is H3
Rename the cell RR
Reference the cell by either H3 or RR

6. Names
Select cell H4
In the Name Box change H4 to RR
Name Box OP H4 fx

7. Names
This replaces the name H3 with RR. From now on, anyplace you would use H3 you can use RR instead. rr RR RR fx

8. Name Manager
To see, edit, and manage names used in the spreadsheet use Name Manager
Ctrl+F3

9. The Market Model
Estimates the degree to which returns on the stock depend on returns to the market.
observed
observed
Estimated using regression analysis

10. Dynamic Regression
Alpha = Intercept(D:D, C:C) (Company returns, Index Returns)
Beta = Slope(D:D, C:C) (Company returns, Index Returns)

11. Dynamic Regression Statistics
Multiple R = Correl (D:D,C:C)
Standard Error = Steyx (D:D,C:C)

12. Dynamic Regression Statistics
R Square = (Multiple R)2
Observations = Count(D:D)
Estimated Parameters: 2

13. Dynamic Regression Statistics
Adjusted R Square
H4 =RR-((k-1)/(N-k))*(1-RR) is much easier to debug than H4 = $H$4-(($H$8-1)/($H$7-$H$7)*(1-$H$4)
… from my Econometrics Text Book

14. Dynamic Regression Statistics
t-Statistic
H13 = rho * SQRT((N-k)/(1-rho^2))
… from my Econometrics Text Book

15. Dynamic Regression Statistics
© Oltheten & Waspi 2012

16. Characteristic Line
© Oltheten & Waspi 2012

17. Characteristic Line Each marker is one monthly observation
Line constructed from calculated alpha and beta
Y axis measures returns on the Equity of our company
X axis measures returns on the Market
© Oltheten & Waspi 2012

18. Observations Generate observed values
From index and company returns generate an XY scatter
Format to fit the professional style of the rest of the model
© Oltheten & Waspi 2012

19. Observations
Format series to fit
Dynamic title
Cleanup axes

20. Observations
Rule #13:
Always verify.
Verify that the index is on the x axis and the company is on the y axis.
September 2008: %, %
October 2008: %, %
© Oltheten & Waspi 2012

21. y=returns on the company
Characteristic Line
Use dynamic α and β to generate characteristic line (no trend lines!)
y=returns on the company
x = returns on the index

22. y=returns on the company
Characteristic Line
beta = slope
alpha=intercept
x = returns on the index
y=returns on the company
© Oltheten & Waspi 2012

23. Characteristic Line
Define the characteristic Line from the minimum to the maximum index value.
= min(C:C)
= average(C:C)
= max(C:C)
© Oltheten & Waspi 2012

24. Characteristic Line Calculate the predicted company return.
at S&P= %
BRK-b = % ( %) = % = %
Note that excel calculates everything to 16 decimal places unless the number is specifically rounded
= alpha + beta * $G16
© Oltheten & Waspi 2012

25. Characteristic Line Add the Characteristic Line to the graph BRK-b
- 5% - 8% 1% 6% 3% 2%

26. Characteristic Line x values y values = 'R(BRK-b)'!$F$14
= 'R(BRK-b)'!$G$16:$G$18
= 'R(BRK-b)'!$H$16:$H$18
x values
y values

27. Characteristic Line 9.393%, 6.417% -16.942%, -8.638%
© Oltheten & Waspi 2012

28. Format Data Series 'Characteristic Line' as a line with no markers
© Oltheten & Waspi 2012

29. Slope looks like a positive 0.57
Reality Check
Maximum S&P: 9.393%
Intercept is %
Slope looks like a positive 0.57
Minimum S&P: %
© Oltheten & Waspi 2012

30. Analysis Toolpak NOT Analysis Toolpak - VBA
Test
Rule #13:
Always test your model
Run the static regression using [Data] [Data Analysis] [Regression]
If you don't have Data Analysis then use Developer/ Add Ins to add Analysis Toolpak
Analysis Toolpak NOT Analysis Toolpak - VBA

31. Test Verify that the results match exactly Rule #13:
Always test your model
Test
Verify that the results match exactly

32. Test
Rule #13:
Always test your model

33. Just delete the entire tab
Test
Rule #13:
Always test your model
Remove the static regression
this is a test procedure, not part of the deliverable.
Just delete the entire tab

34. Regressions

35. Regressions Copy the entire worksheet R(BRK-b) to R(LLY)
Change the links so that it pulls LLY data
When the data changes to LLY returns the regression statistics automatically recalculate

36. Regressions Copy (Ctrl+C) and paste (Ctrl+V) the graph.
The graph will still be linked to BRK-b.
Select the data series (click on one of the markers)
In the formula bar you will see
Change the BRK-b to LLY
Do the same for the characteristic line
=SERIES('R(BRK-b)'!$D$2,'R(BRK-b)'!$C$3:$C$38,'R(BRK-b)'!$D$3:$D$38,1)
=SERIES('R(LLY)'!$D$2,'R(LLY)'!$C$3:$C$38,'R(LLY)'!$D$3:$D$38,1)

37. Regressions When you click on the data series
If you don't see the highlighted data then the graph is still linked to another tab
Excel will highlight the data used in the graph.

38. Regressions When you click on the characteristic line
If you don't see the highlighted data then the graph is still linked to another tab
Excel will highlight the data used in the graph.

39. Regressions
50/50 Portfolio

40. Regressions
Minimum Variance Portfolio

41. Regressions Note what happens to the named variables
These names apply everywhere else
These names apply only to tab R(LLY)
These names apply only to tab R(MVP)
These names apply only to tab R(Portfolio)

42. Market Model