Assignment 2 BUAN 6312

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Feb 20, 2024

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BUAN 6312.501 Assignment 2 a) The econometric model CAPM given is a simple linear regression model because it follows the basic structure of a linear regression model with a linear relationship between the dependent variable (r j – r f ) and the independent variable (r m – r f ), an intercept ( 𝛼 𝑗 ), a slope coefficient (β 𝑗 ), and an error term ( 𝑒 𝑗 ). The inclusion of the intercept is common in regression analysis to account for baseline conditions or factors that may affect the dependent variable, even if theory suggests it should be zero. b)

Company (β 𝑗 ) ( 𝛼 𝑗 ) GE 1.149 -.001 IBM .979 .007 FORD 1.687 .004 MICROSOFT 1.194 .004 DISNEY 1.025 .000 EXXON-MOBIL .446 .006

Aggressive stocks: if Beta value is greater than 1 (β 𝑗 >1) Defensive stocks: If Beta value is less than 1 (β 𝑗 <1) From the above table the aggressive stocks are GE, Ford, Microsoft, and Disney. The defensive stocks are IBM and Exxon The most aggressive stock is for Ford as its Beta value is 1.687. The most defensive stock is Exxon with beta value of 0.446. c) The CAPM model assumes alpha value to be 0. The economic model includes an intercept and error term as described by the equation: ( 𝑟 𝑗 − 𝑟 𝑓 ) = intercept or alpha (j) + slope or (β 𝑗 ) ( 𝑟 𝑚 – 𝑟 𝑓 ) + ( 𝑒 𝑗 ). If we examine the alpha values, the values are close to zero and not significant. Therefore, we can state that the finance theory seems to be true. d) After comparing the Beta values with and without constant, looks like there is no much effect on the Beta values. If the alpha values are zero and beta values are not impacted by the constant we can say that stock returns are directly proportional to returns on the market portfolio and the stock performance is closely aligned and there are no deviations from the market returns.

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Company name (β 𝑗 ) GE 1.148 IBM .985 FORD 1.690 MICROSOFT 1.198 DISNEY 1.025 EXXON-MOBIL .451 e) Return on market > 0:

Company name (β 𝑗 ) ( 𝛼 𝑗 )

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GE 1.568 -.019 IBM 1.121 -.003 FORD 3.705 -.081 MICROSOFT 1.287 .001 DISNEY .992 .000 EXXON-MOBIL .226 .017 Aggressive stocks - GE, Ford, Microsoft, and IBM Most aggressive stock – Ford with beta value 3.705. Defensive stocks - DISNEY and Exxon Most defensive stock - Exxon with beta value 0.226. Return on market < 0:

Company name (β 𝑗 ) ( 𝛼 𝑗 ) GE 1.091 .000 IBM .930 .007 FORD 1.297 .003 MICROSOFT 1.093 -.001 DISNEY 1.130 .006 EXXON-MOBIL .356 -.002 From the above table the aggressive stocks are GE, Ford, Microsoft, and Disney. The defensive stocks are IBM and Exxon The most aggressive stock is for Ford with beta value 1.297. The most defensive stock is Exxon with beta value 0.356. From the above 2 observations, we can say that the defensive/aggressive characterization of individual firms didn’t change except for the IBM and DISNEY.IBM was aggressive when the return on market was positive and DISNEY was defensive, and it was vice versa when the return on market was negative.

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