A return that occurs in the last week of December is represented by In this case, the mean XYZ return is: O E(y I last week of December) Bo+ Bala + Bixi O E(y last week of December) Bo + B+B+Bixi O E(y I last week of December) - Bo + Balz OE(y I last week of December) - Bo + B3+ Bixi 10 and 1=1 XI 0 and 1 = 0 XI 0 and Is = 1 I= 1 and Is=0
A return that occurs in the last week of December is represented by In this case, the mean XYZ return is: O E(y I last week of December) Bo+ Bala + Bixi O E(y last week of December) Bo + B+B+Bixi O E(y I last week of December) - Bo + Balz OE(y I last week of December) - Bo + B3+ Bixi 10 and 1=1 XI 0 and 1 = 0 XI 0 and Is = 1 I= 1 and Is=0
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
1
Transcribed Image Text:The model predicts returns on XYZ stock using returns on a market portfolio, represented by the Dow Jones Industrial Average (DJIA), and a nominal
variable that has three categories; that is, whether the return occurs in the first week of January, in the last week of December, or in any other week
besides these two. The two indicator variables, I and Is, represent the three categories of the qualitative variable.
A return that occurs in the last week of December is represented by
In this case, the mean XYZ return is:
O E(y I last week of December)= Bo + Balz + Bixi
O E(y I last week of December)= Be + B+Ba+ Baxi
OE(y I last week of December) Bo+ Balz
OE(y I last week of December) = Bo + B3 + B1x11
10 and 1=1
XI 0 and I = 0
XI 0 and Isw 1
I= 1 and I 0
Transcribed Image Text:A calendar effect is an observed pattern in stock prices based on the calendar-for example, a rise or fall associated with a particular weekday or
month.
The most well-known effect is the January effect, a tendency for prices to increase (especially for small-capitalization stocks) in the first few weeks of
January. One explanation is that investors sell poor-performing stocks at year-end to reduce their capital gains taxes, thus depressing the prices. This
prompts investors to buy undervalued stocks during the first few weeks of January, causing their prices to go up.
In recent years, what has been observed instead is a rise in stock prices in the last week of December, between the Christmas and New Year holidays.
This December effect may reflect stock buyers' anticipation of the January effect.
Consider the returns on XYZ stock. A researcher makes the simplifying assumption that the January effect occurs during the first week of January. To
determine whether the January and December effects are present for this stock, he specifies the following model:
His regression model is as follows:
y
where y
XI
Po+Pix1 + P₂l₂ + Pals +
the daily return on XYZ stock
the daily return on the Dow Jones Industrial Average
11 if the return occurs in the first week of January; 0 otherwise
11 if the return occurs in the last week of December, 0 otherwise
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