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Assignment No.1
Calculation of Beta
MARKS = 3
DUE ON:
Select any one security and collect any 2 years monthly data from
www.brecorder.com between July 2005 till October 2008.
2.
Obtain KSE 100 points data for the corresponding months (will be
provided to you)
3.
Obtain risk free rates on T-bills for corresponding period (will be
provided to you).
4.
Calculate monthly return from the security prices (Ri) using formula
Ri= ( Price Current Price previous) / Price previous
5.
Deduct the monthly risk free rate from Ri = (Ri-Rf)
6.
Calculate monthly market returns (Rm) from the index points (will be
provided to you) using formula
Ri= (Index Current Index previous) / Index previous
7.
Deduct the monthly risk free rate from Rm = (Rm-Rf)
8.
Ri-Rf is your dependent variable and Rm-Rf is your
independent variable
9.
Use regression technique to find the coefficient of Ri-Rf, this
coefficient is your beta
10. After finding beta, use the CAPM equation to find out the required rate of
return on your stock
11. Compare this required rate of return with actual rate of return of the
stock to find out whether the stock is overvalued, undervalued
or fairly valued.
15% - 20% =
-5% = i.e intercept = -5%
The above example suggests when CAPM gives expected risk premium above the
actual risk premium, the value of intercept will be negative, and vice versa. In both
cases where the value of intercept is either positive or negative, CAPM fails to
correctly predict the risk premium. In nutshell, we can judge the validity of CAPM by
looking at the value of intercept. If the value of intercept is different from zero and
is statistically significant, CAPM fails to predict the true risk premium.