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

2. Rates of Return

3. Financial Markets: A Practicum Rates of Return  Separate Tab  Label it MarketModel  Set up Titlebar and Titles Rule #4:  Manage Sheets Rule #6:  Format for Ease of Use

4. Financial Markets: A Practicum © Oltheten & Waspi 2012 Rates of Return  Relay 36 months  Use the Range verification to check that you have 36 months Rule #1:  Never enter the same information more than once. =Data!A3 =Data!A38 36R x 1C

5. Financial Markets: A Practicum © Oltheten & Waspi 2012 Rates of Return: Equity  Adjust for dividends and splits

6. Financial Markets: A Practicum © Oltheten & Waspi 2012 Rates of Return: Equity  Adjust for dividends and splits  Use either formula  Verify results

7. Financial Markets: A Practicum © Oltheten & Waspi 2012 Rates of Return: Index  The index has neither dividends nor splits © Oltheten & Waspi 2012

8. Financial Markets: A Practicum © Oltheten & Waspi 2012 Rates of Return: Risk Free  Rates are already expressed as annual rates  /12 to generate monthly data  /100 to get mathematical equivalent  1% = 0.01 © Oltheten & Waspi 2012

9. Financial Markets: A Practicum Rates of Return  Format  Express as %  Line up decimals  Reality check  If you see a -63.32% at least double check that the stock did decline 63% Rule #6:  Format for Ease of Use Rule #13:  Always verify results

10. Market Model: Regression

11. Financial Markets: A Practicum © Oltheten & Waspi 2012 observed Estimated using regression analysis The Market Model  Estimates the degree to which returns on the stock depend on returns to the market. observed

12. Financial Markets: A Practicum © Oltheten & Waspi 2012 Dynamic Regression  Alpha = Intercept ($B:$B, $C:$C) (Company returns, Index Returns)  Beta = Slope ($B:$B, $C:$C) (Company returns, Index Returns) Note the form of the function Make sure that there are no other numbers in columns B or C Rule #5:  Maintain Row & Column discipline

13. Financial Markets: A Practicum © Oltheten & Waspi 2012 Regression Statistics  Alpha = Intercept ($B:$B,$C:$C)  Beta = Slope ($B:$B,$C:$C)  Multiple R = Correl ($B:$B,$C:$C)  Standard Error = Steyx ($B:$B,$C:$C)

14. Financial Markets: A Practicum © Oltheten & Waspi 2012  Name cells Names Cell’s name is H3 Rename the cell RR Reference the cell by either H3 or RR

15. Financial Markets: A Practicum © Oltheten & Waspi 2012 rr RR Names  Assign names in the name box (under the toolbar).  This replaces the name H3 with RR. From now on, anyplace you would use H3 you can use RR instead. RRfx

16. Financial Markets: A Practicum © Oltheten & Waspi 2012 Name Manager  To see, edit, and manage names used in the spreadsheet use Name Manager  Ctrl+F3

17. Financial Markets: A Practicum © Oltheten & Waspi 2012 Dynamic Regression Statistics  R Square = (Multiple R) 2  Name it RR  Observations = Count($B:$B)  Name it N  Independent Variables: 2  name it k

18. Financial Markets: A Practicum © Oltheten & Waspi 2012 Dynamic Regression Statistics  Adjusted R Square  H4 =RR-((k-1)/(N-k))*(1-RR) is much easier to debug than H4 = $H$3-(($H$7-1)/($H$6-$H$7)*(1-$H$3) … from my Econometrics Text Book

19. Financial Markets: A Practicum Dynamic Regression Statistics © Oltheten & Waspi 2012

20. Financial Markets: A Practicum Characteristic Line Each marker is one monthly observation Line constructed from calculated alpha and beta X axis measures returns on the Market Y axis measures returns on the Equity of our company

21. Financial Markets: A Practicum Observations © Oltheten & Waspi 2012  Generate observed values  Titlebar J1:S1 and set J1=Data!A1  Highlight B2:C38  Generate XY scatter

22. Financial Markets: A Practicum Observations © Oltheten & Waspi 2012 16.30%,-3.70%  January 2010 should be at -3.70%,16.30%

23. Financial Markets: A Practicum Observations © Oltheten & Waspi 2012  Reset x and y axes  [Chart Tools] [Design] [Select Data]  Select Data and Edit  Series name to Market Model!$B$2  Series X values to Market Model!$C$3:$C$38  Series Y values to Market Model!$B$3:$B$38

24. Financial Markets: A Practicum  January 2010 should be at -3.70%,16.30% Observations © Oltheten & Waspi 2012 -3.70%, 16.30%

25. Financial Markets: A Practicum Observations © Oltheten & Waspi 2012  Format to look professional  Remove gridlines and legend  Axis labels to 0 decimal places  Format markers  Set dynamic title = J1

26. Financial Markets: A Practicum Observations © Oltheten & Waspi 2012

27. Financial Markets: A Practicum © Oltheten & Waspi 2012 Characteristic Line  Use dynamic α and β to generate characteristic line (no trend lines!) x = returns on the index y=returns on the company

28. Financial Markets: A Practicum Observations x = returns on the index y=returns on the company beta = slope alpha=intercept © Oltheten & Waspi 2012

29. Financial Markets: A Practicum Characteristic Line © Oltheten & Waspi 2012  Define the characteristic Line from the minimum to the maximum index value. = min(C:C) = average(C:C) = max(C:C)

30. Financial Markets: A Practicum Characteristic Line © Oltheten & Waspi 2012  Calculate the predicted company return. = alpha + beta G15

31. Financial Markets: A Practicum Characteristic Line © Oltheten & Waspi 2012

32. Financial Markets: A Practicum © Oltheten & Waspi 2012  [Chart Menu][Design][Select Data]  Add the three data points  Format series to make it a line with no markers Characteristic Line x = returns on the index y=returns on the company

33. Financial Markets: A Practicum Reality Check Minimum S&P: -8.20% Maximum S&P: 10.77% © Oltheten & Waspi 2012

34. Financial Markets: A Practicum © Oltheten & Waspi 2012 Test  Run the static regression using [Tools] [Data Analysis] [Regression]  Verify that the results match exactly  Remove the static regression  this is a test procedure, not part of the deliverable.

35. Market Model