How much risk is market risk which can be predicted and how much is idiosyncratic risk which cannot be fully understood or forecasted?.Are you comfortable with that level of accuracy? Multiple R is measure of correlation between IBM’s return and S&P 500 index returns and can be used to estimate accuracy.How accurate will it be at forecasting IBM’s return?.Is beta statistically different from zero? Its T-value is 12.455 which is greater than 1.96, indicating beta is statistically different from zero and can be trusted, making the above return equation correct. If you had a forecast for the market return, R M, you could forecast IBM’s return.īut first is Alpha statistically different from zero? Its T-value is 0.28 which is less than 1.96, indicating alpha is not statistically different from zero. Inserting the values in the CAPM security market line equation you have: The regression estimates for IBM’s alpha and Beta are 0.0004 and 0.855. In your own words explain the risk you are taking and your expected return?ĬAPM Assignment Part 2 – Understanding the Regression output Based on your group’s risk criteria, which security would your team buy?.Based on absolute value, which security has the largest lower limit and smallest lower limit?.

How much is the your group’s risk criteria?_.Step 4 Select the security with the highest mean, expected return.Step 3 Sort the category of securities that satisfy the investors risk criteria by the securities mean.Step 2 Sort the investments into two categories, those that meet the investors risk criteria and those that do not.Step 1 Identify the percent loss occurring with 5% probability that is acceptable.The application of Lower Limit involves four steps: The interpretation of a IBM’s lower limit is that over the next 3 years (sample data period) the probability of losing 3.32% or more of your investment in any week is 5%. Assume the probability in the lower tail is 5%. It assumes the returns are normally distributed and focuses on the probability in the lower tail. The method you are being asked you use in this assignment is called “Lower Limit”. Investors need a way to choose between stocks and there a variety of methods. Start by entering the values from your calculations in the table below: CAPM Assignment Part 1 – Selecting Stocks via the Lower Limit

Risk probability xbeta