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

3. Financial Markets: A Practicum CAPM

4. Financial Markets: A Practicum CAPM  Separate Tab  Label it CAPM  Set up Titlebar and Titles Rule #4:  Manage Sheets Rule #6:  Format for Ease of Use X axis is Beta Y axis is Expected Return

5. Financial Markets: A Practicum  All data is relayed or calculated; if you use a different company or a different index then these will all change automatically Security Market Line =Data!A1 =Average(MarketModel!B:B)*12 =Beta

6. Financial Markets: A Practicum  E[R] = R f + β (R M – R f ) E[R] = R f + β (R M – R f ) Security Market Line β RfRf RMRM

7. Financial Markets: A Practicum © Oltheten & Waspi 2012 Security Market Line  Use XY (Scatter)  XY spaces the x axis according to the x value  Line chart spaces the x axis data evenly, regardless of value  X axis is β  Y axis is E[R]  Observed  Normal as indicated by the CAPM

8. Financial Markets: A Practicum Security Market Line © Oltheten & Waspi 2012  Excel default chart Edit, data series 2, predicted, to line only Edit data series 1, observed, to marker only

9. Financial Markets: A Practicum  Add data labels with [Chart Tools] [Layout][Data Labels] Format Error Bar

10. Financial Markets: A Practicum © Oltheten & Waspi 2012 Format  The error bar is part of Chart Layout  Select the observed series  [Chart Tools][Layout][Error Bars] [More Error Bar Options]

11. Financial Markets: A Practicum © Oltheten & Waspi 2012 Format We need a negative error bar to drop a line from the marker equal to the –ve abnormal return.

12. Financial Markets: A Practicum © Oltheten & Waspi 2012 Format  Excel defaults to both horizontal and vertical error bars. Select and delete the horizontals © Oltheten & Waspi 2012

13. Financial Markets: A Practicum Format © Oltheten & Waspi 2012

14. CAPM © Oltheten & Waspi 2012