Surname3 Also β > 1 which implies that the market stock is defensive. The β coefficient is positive which implies that as the market return increases, the portfolio return also increases and vice versa, or in simpler terms that market returns and portfolio returns move in the same direction. A unit change in market return causes an average of 1.270 change in portfolio returns. 000 Therefore, the CAPM model can be written as R = 0.002 + 1.270 MKT The p-value of the market return is very small which implies that it is a significant predictor of the portfolio returns. The CAPM model results is shown in the table below Coefficients Model t P-Value. The capital asset pricing model is as follows R = α + βMKT + ϵ t Where R is the portfolio’s return at time t, MKT is the market return at time tt, while ϵ ttt is the random error component, and should be normally distributed with mean zero and variance σ 2. It examines the relationship between the risk and expected returns. Capital Asset Pricing Model (CAPM) This model provides a method for calculating the quantity of risk and then expressing that risk into expected returns estimation on the particular equity. A Sharpe ratio of 0.2711 is relatively high which indicates that the investment from this portfolio performed generally well. The higher the Sharpe ratio the better, as it indicates good investment performance given a risk. A Sharpe ratio of 0.2711 indicates the excess returns received for holding or investing in a riskier asset. Volatility has a relationship with the returns as jumps in volatility leads to jumps in expected returns (Eraker et al. Surname2 portfolio is 0.2692, which shows how the returns changed from year to year. X B/M - 10 Annualized Return 0.073 Annualized Std Dev 0.2692 Annualized Sharpe (Rf=0%) 0.2711 An Annualized Return of 0.073 implies that the portfolio earned 0.073 per year which can also be expressed as a percentage as 7.3% per annum. The table below also shows some important information about the portfolio. The standard deviation of the monthly returns was 0.0777166, which is relatively low which indicates that the returns are clustered around the mean. From the table above, the mean indicates the monthly average returns of this portfolio was 0.008950. The total returns from this portfolio were 5.3701, that implies that the portfolio generally made a profit over the span of 50 years rather than a loss. This implies that the minimum loss accrued from investing an amount is 0.3177, while the maximum profit accrued was 0.4021. 0777166 600 The minimum returns from this portfolio are -0.3177 while the maximum returns from this portfolio is 0.4021. From the data, the descriptive statistics are as shown in the table below Descriptive Statistics N Minimum Maximum Sum Mean Std. To explain some of the trend in the US equity portfolio, a data of returns of a US equity portfolio, plus the time series of 3 market factors is obtained. It is a common practice of investors to create a “pool” of financial investments, equities, stocks and other market – traded securities, known as portfolio, a basket of assets in other words. The investors choice of buying equities is based on several factors, and the returns from different equities over a span of time more often form a pattern. The term equity has different meaning depending on the context, however, in general, equity refers to shares in a company ownership, so if a company sells equities, it sells partial ownership of the company. Surname1 Name Instructor Course Date Econometric Analysis of Equity Returns The profits or dividends which investors receive from their investments are known as equity returns.
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