• CAPM equation
• Risk Free Rate
• Risk Premium
• Beta
• Required Rate of Return
• Obtain daily market returns for two stocks in the S&P500
• Calculate daily holding period returns for each stock
• Note: Yahoo! Finance gives you an adjusted closing price for a stock
• Calculate Beta for each stock (beta measures a stock’s volatility or the degree to which its price fluctuates in relation to the overall market) using linear regression analysis. Include this analysis as part of the project.
• Calculate expected return for a two-asset portfolio using 10% increments
• Use Capitol Asset Pricing Model (CAPM), however, in order to use CAPM you need Beta, Risk-Free Rate (RFR), and Market Risk Premium (MRP). For this analysis, assume risk premium = 7% (historical information actually suggest MRP = 8.5% but we will assume 7%). Calculate the overall portfolio standard deviation or “risk of the portfolio”
• Use 10% increments for the weights of the assets
• Calculate variance and standard deviation of each stock and the correlation coefficient. Your expected return in #3 is in years, and your standard deviation is in days. Convert daily standard deviation to yearly standard deviation by considering the number of days in the year
• Display investment opportunity set graphically and explain implications and potential investment strategies to consider
• Create an Appendix for the novice investor. Clearly explain the meaning and implication of the following key variables or equations:
• CAPM equation
• Risk-Free Rate
• Risk Premium
• Beta
• Required Rate of Return
