Got a tricky question? Receive an answer from students like you! Try us!

market rate of return - Assignment Example

Only on StudentShare
Undergraduate
Assignment
Finance & Accounting
Pages 3 (753 words)

Summary

The security market line (SML) Determination of the y-intercept and the slope of the security market line by running a regression line (appendix); after running a regression line the slope is 8.375 and the y intercept is -0.166 Interpretation of my regression, this includes what the y-intercept and the slope mean in terms we have used in this class…

Extract of sample
market rate of return

If it is observed that the returns are consistently below the SML line, it will mean that the stock is expected to rise, while if the returns are seen to be consistently above 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 usually outperforms the market, while a beta that is less than 1 implies that it underperforms the market (Shanken, 56). The y-intercept of the SML is equal to risk-free 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 regression line the equation created is=8.375x-0.166 Going by beta values, the security market line indicates that the relationship between return and risk is linear for the individual securities. For instance, increased return= increased risk. Essentially it indicates what return someone needs to earn on an investment for it to be worth taking, and this is seen to increase with the investment riskiness. ...
Download paper
Not exactly what you need?

Related Essays

ARCH modeling: forecasting the return in the UK stock market
On the other hand, the index helps ARCH models to bring forth exact forecasts for out-of-sample forecasting on considering performance measures. This study would help to develop an investing strategy based on the results that would bring about significant positive returns. Keywords: ARCH Models, Stock index volatility, Predictive ability, ARCH modeling: forecasting the return in the UK stock market Introduction There have been quite a number of studies which show that different parameters of ARCH models offer good estimates of equity returns. The compatibility of ARCH models are evident in…
42 pages (10542 words)
Financial Management. Evaluation of a company
Rights issue by the companies refers to a corporate invitation to the existing shareholders of the company to buy additional new shares of the company. Cash-strapped companies generally turn to rights issue for raising finance from market for investments in business activates. The companies grant shareholders chance to buy new shares at a discount rate than current market of share on a pre mentioned future date. Investment banks do this activity for business for some percentage of banking percentage on total amount of issued fund. By issuing share, the companies give opportunity to the…
10 pages (2510 words)
Risk and Return
It not only takes into account the risk free rate of return but also includes market risk premium while at the same time taking beta of the stock into account too. (Valuebasedmanagement.net, 2011) This paper will discuss as to how to compute the cost of equity for Wal-Marts while at the same comparing it with other firms. Other models for caluclating cost of equity such as dividend discount model as well as arbitrage pricing theory. 1) Calculations Name of the Company Wal-Mart Nestle McDonald Beta Value 0.371 0.582 0.363 US Treasury (RF) 3% 3% 3% RM-RF 7% 7% 7% Cost of Equity 5.59% 7.06% 5.52%…
3 pages (753 words)
Strategic Corporate Finance
Quite simply, the investors also have their own set of motivations and would only be willing to invest in a corporation’s equity or debt if it meets with their required rate of return. They may be willing to take a risk in investing in a particular firm if the returns from this are higher than that offered by US Treasury bonds with one year to maturity. Since the rate of return on these bonds are guaranteed by the US Government, they are thought to be a riskless investment, assuming that the US Government will never default on payment of the principal and interest on the due dates.…
5 pages (1255 words)
Johnson Control Capital Investment
Therefore, the company possess huge amount of investment in foreign markets foreign business operations. Theoretically, some traditional and efficient methods are used to evaluate capital investment in domestic as well as emerging foreign markets by businesses. But, capital investment is highly risk associated strategic business activity and the company needs to focus beyond the traditional methods of evaluating capital investments like net present value, internal rate of return, payback period etc. Emerging financial businesses like investment banking and financial research companies offers…
5 pages (1255 words)
The assignment is in three parts:1 Outline and explain the Capital Asset Pricing Model (CAPM) (40%)2. Show how the Capital Asset
William Sharp introduced the model in 1964.Corporate sector uses CAPM in order to identify the required rate of return on assets deployed to achieve organizational objectives. In order to effectively implement CAPM, the corporate sector is required to take into account, the sensitivity of the assets to the symmetric or market risk. The symmetric risk is identified within CAPM equation as beta (?). Keeping in view the logical relationship of CAPM with business related decisions, beta (?) helps the corporate sector to determine the investor’s cost of capital equity acquired. Other factors that…
6 pages (1506 words)