Market rate of return Assignment Example | Topics and Well Written Essays - 750 words

foodstuff rate of return - Assignment ExampleIf it is observed that the returns are systematically below the SML line, it will mean that the stock is expected to rise, while if the returns are seen to be consistently supra the line, then it will mean that the stock is due for a drop. Graphing the SML for a particular stock requires a stock with a beta that is higher than 1 and this commonly outperforms the trade, while a beta that is slight than 1 implies that it underperforms the market (Shanken, 56). The y-intercept of the SML is equal to risk- let go rate. The SML slope is equal to market risk premium and it usually reflects the return trade of a given time. Beta is termed as non-diversifiable or systematic risk. Basing on the generated obsession line the equation created is=8.375x-0.166 Going by beta values, the security market line indicates that the relationship in the midst of return and risk is linear for the individual securities. For instance, increased return= incre ased risk. Essentially it indicates what return mortal needs to earn on an investment for it to be worth taking, and this is seen to increase with the investment riskiness. The Security Market Line formula is as below Required Return = Risk Free Rate + (Beta x Market Return - Risk Free Rate) Calculate 95% government agency legal separations for the slope and y-intercept. SUMMARY OUTPUT obsession Statistics Multiple R 0.997314 R Square 0.994636 Adjusted R Square 0.992848 Standard Error 0.005276 Observations 5 ANOVA df SS MS F Significance F Regression 1 0.015486 0.015486 556.2975 0.000167 Residual 3 8.35E-05 2.78E-05 thoroughgoing 4 0.01557 Coefficients Standard Error t Stat P-value Lower 95% speed 95% Lower 95.0% Upper 95.0% Intercept 0.020428 0.004799 4.256403 0.023776 0.005154 0.035702 0.005154 0.035702 X Variable 1 0.118761 0.005035 23.58596 0.000167 0.102737 0.134786 0.102737 0.134786 RESIDUAL OUTPUT Observation Predicted Y Residuals 1 0.04418 0.00582 2 0.079809 -0.00 481 3 0.109499 -0.0045 4 0.162942 0.002058 5 0.19857 0.00143 Look up the legitimate return on one-year treasury bills/notes as your risk-free rate. Two good sources. In your report, please state your source and the date used. http//fxtrade.oanda.com/ digest/economic-indicators/united-states/rates/yield-curve Date used November 29, 2013 My risk free rate is 0.05 Given the current risk-free rate, is the reverse estimate of your risk-free rate match the actual current risk-free rate? Use confidence intervals to help answer this question. Basing on the confidence interval calculation above, the regression estimate of my risk free rate does not match the actual current risk-free rate because it falls outside the interval or range of 0.10273 and 0.13478 What is the current expected market rate of return (based on your regression)? Basing on my regression, the current expected market rate of return is as below Using the equation generated from the regression Y=8.375x-0.166 The current e xpected market rate of return is equal to X Therefore X=(y+0.166)/8.375 notwithstanding we are given Y which is 0.05. The X will now be (0.05+0.166)/8.375=0.02579 Therefore, the current expected market rate of return is 0.02579 Works Cited Shanken, J.On the Estimation of Beta-Pricing Models,Review of Financial Studies, 5(1), 133,1992. Print Shanken, J.,and G.