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

2. CAPM

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

4. 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

5. 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

6. Security Market Line
Calculate Annual Returns
© Oltheten & Waspi 2012

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

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

9. Graph

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

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

12. Security Market Line
Add data labels

13. Abnormal Returns
Select data series Observed Returns and add Error Bars

14. 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

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

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

17. CAPM