A B C D E F

1 Tool Kit Chapter 25 11/23/2018

2 Portfolio Theory and Asset Pricing Models
3
4
5 25-1 Efficient Portfolios
6
7 PORTFOLIO RISK AND RETURN: THE TWO-ASSET CASE
8
9 Suppose there are two assets, A and B. w A is the percent of the portfolio invested
10 in asset A. Since the total percentages invested in the assets must add up to 1, (1-
11 wA) is the percent of the portfolio invested in asset B.
12
13 The expected return on the portfolio is the weighted average of the expected
14 returns on asset A and asset B.
15
16
17
18
19 r ̂_p= w_A r ̂_A+ w_B r ̂_B
20
21
22
23 The standard deviation of the portfolio, σ p, is not a weighted average. It is:
24
25
26
27  p  WA2 A2  (1  WA ) 2  B2  2WA (1  WA )  AB  A  B
28
29
30
31
32 ATTAINABLE PORTFOLIOS: THE TWO ASSET-CASE
33
34 Asset A Asset B
35 Expected return, r hat 5% 8%
36 Standard deviation, σ 4% 10%
37
38
39 Using the equations above, we can find the expected return and standard
40 deviation of a portfolio with different percentages invested in each asset.
41
42
 A B C D E F
43 Correlation = 1

Proportion of Proportion of
44 Portfolio in Security Portfolio in Security
A B
(Value of wA) (Value of 1-wB) rp σp
45 1.00 0.00 5.00% 4.0%
46 0.90 0.10 5.30% 4.6%
47 0.80 0.20 5.60% 5.2%
48 0.70 0.30 5.90% 5.8%
49 0.60 0.40 6.20% 6.4%
50 0.50 0.50 6.50% 7.0%
51 0.40 0.60 6.80% 7.6%
52 0.30 0.70 7.10% 8.2%
53 0.20 0.80 7.40% 8.8%
54 0.10 0.90 7.70% 9.4%
55 0.00 1.00 8.00% 10.0%
56
57
Expected return

58
59 ρAB = +1: Attainable Set of Risk/Return Combinations
60
61 10%
62 B
63
64
65 5%
66 A
67
68
69
70 0%
71
72 Risk, σp
73
74
75
76
77 Correlation = 0

Proportion of Proportion of
78 Portfolio in Security Portfolio in Security
A B
(Value of wA) (Value of 1-wA) rp σp
79 1.00 0.00 5.00% 4.0%
80 0.90 0.10 5.30% 3.7%
81 0.80 0.20 5.60% 3.8%
82 0.70 0.30 5.90% 4.1%
83 0.60 0.40 6.20% 4.7%
84 0.50 0.50 6.50% 5.4%
85 0.40 0.60 6.80% 6.2%
86 0.30 0.70 7.10% 7.1%
87 0.20 0.80 7.40% 8.0%
88 0.10 0.90 7.70% 9.0%
 A B C D E F
89 0.00 1.00 8.00% 10.0%
90

Expected return
91
92
93 ρAB = 0: Attainable Set of Risk/Return Combinations
10%
B

5% A

0%

Risk, σp
 Expected return
A ρAB = 0:B C
Attainable Set of Risk/Return D
Combinations E F
94 10%
95 B
96
97
98 5% A
99
100
101
102 0%
103
104
Risk, σp
105
106
107
108
109 Correlation = -1

Proportion of Proportion of
110 Portfolio in Security Portfolio in Security
A B
(Value of wA) (Value of 1-wA) rp σp
111 1.00 0.00 5.00% 4.0%
112 0.90 0.10 5.30% 2.6%
113 0.80 0.20 5.60% 1.2%
114 0.70 0.30 5.90% 0.2%
115 0.60 0.40 6.20% 1.6%
116 0.50 0.50 6.50% 3.0%
117 0.40 0.60 6.80% 4.4%
118 0.30 0.70 7.10% 5.8%
119 0.20 0.80 7.40% 7.2%
120 0.10 0.90 7.70% 8.6%
121 0.00 1.00 8.00% 10.0%
122
123
Expected return

124
125 ρAB = -1: Attainable Set of Risk/Return Combinations
126
127 10%
128 B
129
130
131 5% A
132
133
134
135 0%
136 0% 2% 4% 6% 8% 10% 12%
137
Risk, σp
138
139
140
141 Figure 25-1
142 Expected Return and Standard Deviation under Various Assumptions
 A B C D E F
143
144 σp
Proportion of Proportion of
145 Portfolio in Security Portfolio in Security 𝐫 ̂_𝐏
Case I Case II Case III
A B
146 (Value of wA) (Value of 1 − wA) ρAB = +1.0 ρAB = 0.0 ρAB = −1.0
147 1.00 0.00 5.00% 4.0% 4.0% 4.0%
148 0.86 0.14 5.41% 4.8% 3.7% 2.1%
149 0.75 0.25 5.75% 5.5% 3.9% 0.5%
150 0.71 0.29 5.86% 5.7% 4.0% 0.0%
151 0.50 0.50 6.50% 7.0% 5.4% 3.0%
152 0.25 0.75 7.25% 8.5% 7.6% 6.5%
153 0.00 1.00 8.00% 10.0% 10.0% 10.0%
154
155
156 The portfolio with the minimum risk is:
157 B (B  ABA )
wA 
158 wA for minimum sigma:
2A  2B  2ABAB
159
160
161 For ρAB = 0
162 wA to minimize σp = 0.862068966
163 Minimum σp = 3.7%
164
165 For ρAB = -1
166 wA to minimize σp = 0.714285714
167 Minimum σp = 0.0%
168
169
170
171 25-5 Calculating Beta Coefficients
172
173
174 We downloaded stock prices from [Link] for Apple using its ticker symbol,
175 AAPL. We also downloaded data for the S&P 500 (^GSPC) which contains most actively traded
176 stocks, and the Vanguard Mid-Cap Value Index Fund Investor Shares mutual fund (VMVIX). We
computed returns, as shown in Chapter 6. We also obtained the monthly rates on 3-month
177 Treasury bills from the FRED II data base at the St. Louis Federal Reserve,
178 [Link]
179

rp,
180 Vanguard rRF, Risk-
Mid-Cap Free Rate
Value (Weekly Excess
Index Fund Yield on 3- market
Date (Friday of rM, Market Return ri, Apple Investor Month T- return (rM-
Week) (S&P 500 Index) Return Shares Bill) rRF)
181 9/22/2017 0.1% -5.0% -0.3% 0.02000% 0.1%
182 9/29/2017 0.7% 1.5% 1.6% 0.02038% 0.7%
183 10/6/2017 1.2% 0.8% 0.9% 0.02038% 1.2%
184 10/13/2017 0.2% 1.1% 0.2% 0.02096% 0.1%
 A B C D E F
185 10/20/2017 0.9% -0.5% 0.9% 0.02115% 0.8%
186 10/27/2017 0.2% 4.4% -0.9% 0.02135% 0.2%
187 11/3/2017 0.3% 5.8% -0.5% 0.02231% 0.2%
188 11/10/2017 -0.2% 1.3% 0.0% 0.02346% -0.2%
189 11/17/2017 -0.1% -2.2% 0.8% 0.02423% -0.2%
190 11/24/2017 0.9% 2.8% 0.6% 0.02500% 0.9%
191 12/1/2017 1.5% -2.2% 2.2% 0.02462% 1.5%
192 12/8/2017 0.4% -1.0% 0.8% 0.02481% 0.3%
193 12/15/2017 0.9% 2.7% 0.1% 0.02538% 0.9%
194 12/22/2017 0.3% 0.6% 0.5% 0.02615% 0.3%
195 12/29/2017 -0.4% -3.3% 0.5% 0.02731% -0.4%
196 1/5/2018 2.6% 3.4% 1.8% 0.02712% 2.6%
197 1/12/2018 1.6% 1.2% 1.9% 0.02750% 1.5%
198 1/19/2018 0.9% 0.8% 0.4% 0.02788% 0.8%
199 1/26/2018 2.2% -3.9% 1.5% 0.02750% 2.2%
200 2/2/2018 -3.9% -6.4% -4.1% 0.02808% -3.9%
201 2/9/2018 -5.2% -2.5% -4.5% 0.02962% -5.2%
202 2/16/2018 4.3% 10.7% 4.0% 0.03077% 4.3%
203 2/23/2018 0.6% 1.8% 0.2% 0.03154% 0.5%
204 3/2/2018 -2.0% 0.4% -2.1% 0.03173% -2.1%
205 3/9/2018 3.5% 2.1% 3.4% 0.03231% 3.5%
206 3/16/2018 -1.2% -1.1% -1.0% 0.03365% -1.3%
207 3/23/2018 -6.0% -7.3% -5.2% 0.03385% -6.0%
208 3/30/2018 2.0% 1.7% 2.8% 0.03385% 2.0%
209 4/6/2018 -1.4% 0.4% -1.0% 0.03346% -1.4%
210 4/13/2018 2.0% 3.8% 1.3% 0.03365% 2.0%
211 4/20/2018 0.5% -5.2% 0.7% 0.03481% 0.5%
212 4/27/2018 0.0% -2.1% 0.3% 0.03558% 0.0%
213 5/4/2018 -0.2% 13.3% -1.1% 0.03558% -0.3%
214 5/11/2018 2.4% 2.6% 1.0% 0.03635% 2.4%
215 5/18/2018 -0.5% -0.8% 0.2% 0.03692% -0.6%
216 5/25/2018 0.3% 1.2% 0.0% 0.03692% 0.3%
217 6/1/2018 0.5% 0.9% -0.3% 0.03712% 0.5%
218 6/8/2018 1.6% 0.8% 1.6% 0.03731% 1.6%
219 6/15/2018 0.0% -1.5% 0.0% 0.03731% 0.0%
220 6/22/2018 -0.9% -2.1% -0.6% 0.03731% -0.9%
221 6/29/2018 -1.3% 0.1% -0.8% 0.03712% -1.4%
222 7/6/2018 1.5% 1.5% 1.5% 0.03788% 1.5%
223 7/13/2018 1.5% 1.8% 0.4% 0.03808% 1.5%
224 7/20/2018 0.0% 0.1% 0.0% 0.03846% 0.0%
225 7/27/2018 0.6% -0.2% 0.5% 0.03846% 0.6%
226 8/3/2018 0.8% 8.9% 0.5% 0.03904% 0.7%
227 8/10/2018 -0.2% -0.2% -0.7% 0.03962% -0.3%
228 8/17/2018 0.6% 5.2% 0.7% 0.03981% 0.6%
229 8/24/2018 0.9% -0.7% 0.7% 0.04000% 0.8%
230 8/31/2018 0.9% 5.3% 0.0% 0.04077% 0.9%
231 9/7/2018 -1.0% -2.8% -1.0% 0.04115% -1.1%
232 9/14/2018 1.2% 1.1% 1.3% 0.04135% 1.1%
233 Minimum -6.0% -7.3% -5.2% 0.02000% -6.0%
234 Maximum 4.3% 13.3% 4.0% 0.04135% 4.3%

235 Average
(annualized) 15.9% 38.9% 11.9% 1.647% 14.2%
 A B C D E F

236 Standard deviation

(annualized) 12.9% 27.4% 12.0% 0.048% 12.9%
237 Correlation with market return, r 0.50 0.95 -0.03
238 R-square 0.25 0.90 0.00
239 Slope 1.057 0.882 0.00
240
241
Using the AVERAGE function and the STDEV function, we found the average historical returns
242 and standard deviations. (We converted these from weekly figures to annual figures. Notice
243 that you must multiply the weekly standard deviation by the square root of 52, and not 52, to
244 convert it to an annual basis.) These are shown in the rows above.
245
246 We also use the CORREL function to find the correlation of the market with the other assets.
247
248 Using the function Wizard for SLOPE, we found the slope of the regression line, which is the
249 beta coefficient. We also use the function Wizard and the RSQ function to find the R-Squared of
250 the regression.
251
252
253 Using the Chart Wizard, we plotted Apple's returns on the y-axis and the market returns on the
x-axis. We also used the menu Chart > Options to add a trend line, and to display the regression
254 equation and R2 on the chart. The chart is shown below. We also used the regression feature to
255 get more detailed data. These results are also shown below.
256
257
258 Apple Analysis
259 Figure 25-8
260 Calculating a Beta Coefficient for Apple: The Market Model
261
262
263
Historic Realized
264 Apple Returns (%)
265
10%
266
267
268
269
270
271 f(x) = 1.05745961161286 x + 0.004249486069677
272 R² = 0.247908652890043
273
274
275
−10% 10%
276
277 Historic Realized
Market Returns (%)
278
279
280
281
282
283
284 −10%
285
 A B C D E F
286
287 Magellan Analysis
288 Figure 25-9
289 Calculating a Beta Coefficient for Vanguard's Mid-Cap Value Index
290 Fund Investor Shares: The Market Model
291
292
293 Historic Realized
294 Vanguard Returns (%)
295
10%
296
297
298
299
300
301
302 f(x) = 0.882066561316225 x − 0.000400253996828
303 R² = 0.898074408856549
304
305 −10% 10%
306
307 Historic Realized
308 Market Returns (%)
309
310
311
312
313 −10%
314
315
316
317
 A B C D E F
318 The CAPM vs. the Market Model
319
320 We have been regressing the stock (or portfolio) returns against the market
321 returns. However, CAPM actually states that we should regress the excess stock
returns (the stock return minus the short-term risk free rate) against the excess
322 market returns (the market return minus the short-term risk free rate). We show
323 the graph for such a regression below. Notice that it is virtually identical to the
324 market model regression we used earlier for GE. Since it usually doesn't change
the results whether we use the market model to estimate beta instead of the
325 CAPM model, we usually use the market model.
326
327
328
329
330
331 Calculating a Beta Coefficient for Apple: CAPM
332
333
Excess Returns
334 on Apple, %
335
336 10%
337
338
339
340
341
342 f(x) = 1.05658344916815 x + 0.004270077947038
343 R² = 0.247638566184845
344
345 0%
346 -10% 0% 10%
347
348
349 Excess Returns
350 on the Market, %
351
352
353 -10%
354
355
356
357
358
359
360
361 Calculating a Beta Coefficient for Vanguard's Mid-Cap Value Index
362 Fund Investor Shares: CAPM
363
364
365
Excess Returns
366 on Vanguard, %
367
368
10%
369
370

f(x) = 0.882174060033888 x − 0.000437899065975

R² = 0.898095650590233
0%
-10% 0% 10%

Excess Returns
on the Market, %
 Excess Returns
on Vanguard, %

10%
A B C D E F
371
372
373
374
375 f(x) = 0.882174060033888 x − 0.000437899065975
376 R² = 0.898095650590233
377 0%
378 -10% 0% 10%
379
380
381 Excess Returns
382 on the Market, %
383
384
385 -10%
386
387
388
389
390
391
392
393 Table 25-2 Regression Results for Calculating Beta
Probability Lower 95%
394 Regression of Confidence
395 Coefficient t Statistic t Statistic Interval

396 Panel A: Apple

(Market model)
397
398 Intercept 0.0042 0.91 36.84% -0.005
399 Slope 1.0575 4.06 0.02% 0.534
400
401 Panel B: Vanguard Fund
(Market model)
402 Intercept -0.0004 -0.53 59.86% -0.002
403 Slope 0.8821 20.99 0.00% 0.798
404
405 Panel C: Apple
(CAPM: Excess returns)
406 Intercept 0.0043 0.91 36.48% -0.005
407 Slope 1.0566 4.06 0.02% 0.533
408
409 Note: The market model uses unadjusted returns, the CAPM model uses returns in excess of the risk-free rate.
410
411
412
413 Performance Measures for Vanguard Using CAPM (not Market Model)
414
415 Jensen's Alpha
416 Intercept from CAPM regression
417 -2.28% per year
418 -0.58 t statistic
419 56.367% Probability that the intercept is not zero
 A B C D E F
420
421 Sharpe's Reward-to-Variability Ratio
422 Average annual return in excess of risk-free rate divided by standard deviation
423
424 Vanguard 10.3% divided by 12.0%
425 0.85
426
427 S&P 500 14.2% divided by 12.9%
428 1.10
429
430 Treynor's Reward-to-Volatility Ratio
431 Average annual return in excess of risk-free rate divided by beta
432
433 Vanguard 10.3% divided by 0.88
434 11.6%
435
436 S&P 500 14.2% divided by 1.00
437 14.2%
438
 G H I J K L
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172
173 Note: Downloading weekly data from FRED gives date for the Friday data. Downloading weekly
174 data from Yahoo gives the Friday data, but shows a date for Monday (4 days prior), the first day of
the week of weekly data. So be sure to use the weekly returns for the right week, for which Yahoo
175 shows the date for the beginning of the week (but uses the full week's data) while FRED shows the
176 date for the end of the week.
177
178
179

180
Excess
Excess stock portfolio
return return
(ri-rRF) (rp-rRF)
181 -5.0% -0.3%
182 1.4% 1.6%
183 0.7% 0.9%
184 1.1% 0.1%
 G H I J K L
185 -0.5% 0.9%
186 4.3% -1.0%
187 5.8% -0.6%
188 1.2% -0.1%
189 -2.3% 0.8%
190 2.8% 0.6%
191 -2.3% 2.2%
192 -1.0% 0.7%
193 2.7% 0.1%
194 0.6% 0.5%
195 -3.3% 0.4%
196 3.4% 1.8%
197 1.2% 1.9%
198 0.7% 0.3%
199 -3.9% 1.5%
200 -6.4% -4.1%
201 -2.6% -4.5%
202 10.7% 4.0%
203 1.7% 0.1%
204 0.4% -2.2%
205 2.1% 3.4%
206 -1.1% -1.0%
207 -7.4% -5.2%
208 1.7% 2.8%
209 0.3% -1.0%
210 3.7% 1.3%
211 -5.2% 0.6%
212 -2.1% 0.2%
213 13.2% -1.2%
214 2.6% 1.0%
215 -0.9% 0.2%
216 1.2% 0.0%
217 0.8% -0.4%
218 0.7% 1.6%
219 -1.5% 0.0%
220 -2.1% -0.7%
221 0.1% -0.8%
222 1.5% 1.4%
223 1.7% 0.4%
224 0.0% 0.0%
225 -0.3% 0.5%
226 8.9% 0.5%
227 -0.3% -0.7%
228 5.2% 0.7%
229 -0.7% 0.6%
230 5.3% 0.0%
231 -2.8% -1.0%
232 1.1% 1.3%
233 -7.4% -5.2%
234 13.2% 4.0%

235 37.2% 10.3%

 G H I J K L

236
27.4% 12.0%
237 0.50 0.95
238 0.25 0.90
239 1.057 0.882
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261
262 Apple Regression Results using Data Analysis Regression (see columns to right)
263 Beta
264 Coefficient 1.0575
265 t statistic 4.06
266 Probability of t stat. 0.017%
267 Lower 95% confidence interval 0.53
268 Upper 95% confidence interval 1.58
269
270 Intercept
271 Coefficient 0.0042
272 t statistic 0.91
273 Probability of t stat. 36.8%
274 Lower 95% confidence interval -0.005
275 Upper 95% confidence interval 0.014
276 Annualized intercept 0.221
277
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285
 G H I J K L
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290
291
292 Vanguard Regression Results (See columns J-N)
293 Beta
294 Coefficient 0.8821
295 t statistic 20.99
296 Probability of t stat. 0.000%
297 Lower 95% confidence interval 0.80
298 Upper 95% confidence interval 0.97
299
300 Intercept
301 Coefficient -0.0004
302 t statistic -0.53
303 Probability of t stat. 59.9%
304 Lower 95% confidence interval -0.002
305 Upper 95% confidence interval 0.001
306 Annualized intercept -0.021
307
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 G H I J K L
318
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331
332 CAPM (excess return) Model
333 Regression Results (See columns J-N)
334 Beta
335 Coefficient 1.0566 1.0566
336 t statistic 4.06
337 Probability of t stat. 0.0%
338 Lower 95% confidence interval 0.53
339 Upper 95% confidence interval 1.58
340
341 Intercept
342 Coefficient 0.00427
343 t statistic 0.91
344 Probability of t stat. 36.5%
345 Lower 95% confidence interval -0.005
346 Upper 95% confidence interval 0.014
347 Annualized intercept 0.222
348
349
350
351
352
353
354
355
356
357
358
359
360
361
362
363
364 CAPM (excess return) Model
365 Regression Results (See columns J-N)
366 Beta
367 Coefficient 0.8822 2.1831
368 t statistic 20.99
369 Probability of t stat. 0.0%
370 Lower 95% confidence interval 0.80
 G H I J K L
371 Upper 95% confidence interval 0.97
372
373 Intercept
374 Coefficient -0.00044
375 t statistic -0.58
376 Probability of t stat. 56.4%
377 Lower 95% confidence interval -0.002
378 Upper 95% confidence interval 0.001
379 Annualized intercept -0.023
380
381
382
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384
385
386
387
388
389
390
391
392
393 Upper 95%
394 Confidence
395 Interval

396
397
398 0.014
399 1.581
400
401
402 0.001
403 0.966
404
405
406 0.014
407 1.580
408
409
ses returns in excess of the risk-free rate.
410
411 LINEST Results: y=mx+b
412 Read comment here.
413 Slope (m) 0.88217406
414 Std. Error of m 0.042024673
415 R2 0.898095651
416 F 440.6561917
417 SS Regression 0.012702726
418
419
 G H I J K L
420 t-stat for slope 20.991812492
421 Prob of t 1.894513E-26
e divided by standard422
deviation
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173 Downloading weekly
es date for the Friday data.
ws a date for Monday (4174days prior), the first day of
weekly returns for the right week, for which Yahoo
175
but uses the full week's data) while FRED shows the
176
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179

180

181
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 M N O P Q R

236

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262 SUMMARY OUTPUT
263
264 Regression Statistics
265 Multiple R 0.497904260767111
266 R Square 0.247908652890044
267 Adjusted R Square 0.232866825947844
268 Standard Error 0.033274440497364
269 Observations 52
270
271 ANOVA
272 df SS MS F Significance F
273 Regression 1 0.0182479 0.0182479 16.4812860727 0.0001727
274 Residual 50 0.0553594 0.0011072
275 Total 51 0.0736073
276
277 Coefficients Standard Error t Stat P-value Lower 95%
278 Intercept 0.004249486069677 0.0046822 0.9075909 0.36844804954 -0.005155
279 X Variable 1 1.05745961161286 0.2604763 4.059715 0.0001727437 0.5342775
280
281
282
283
284
285
 M N O P Q R
286
287
288
289
290
291
292 SUMMARY OUTPUT
293
294 Regression Statistics
295 Multiple R 0.947667878983217
296 R Square 0.898074408856549
297 Adjusted R Square 0.89603589703368
298 Standard Error 0.005368393436692
299 Observations 52
300
301 ANOVA
302 df SS MS F Significance F
303 Regression 1 0.0126966 0.0126966 440.553936838 1.904E-26
304 Residual 50 0.001441 2.882E-05
305 Total 51 0.0141376
306
307 Coefficients Standard Error t Stat P-value Lower 95%
308 Intercept -0.000400253996828 0.0007554 -0.529854 0.598558593 -0.001918
309 X Variable 1 0.882066561316225 0.0420244 20.989377 1.9044324E-26 0.797658
310
311
312
313
314
315
316
317
 M N O P Q R
318
319
320
321
322
323
324
325
326
327
328
329
330
331
332
333 SUMMARY OUTPUT
334
335 Regression Statistics
336 Multiple R 0.49763296332221
337 R Square 0.247638566184844
338 Adjusted R Square 0.232591337508541
339 Standard Error 0.033274926793331
340 Observations 52
341
342 ANOVA
343 df SS MS F Significance F
344 Regression 1 0.018222 0.018222 16.4574202674 0.0001744
345 Residual 50 0.055361 0.0011072
346 Total 51 0.073583
347
348 Coefficients Standard Error t Stat P-value Lower 95%
349 Intercept 0.004270077947038 0.0046689 0.9145726 0.36480563865 -0.005108
350 X Variable 1 1.05658344916815 0.2604491 4.0567746 0.00017438454 0.533456
351
352
353
354
355
356
357
358
359
360
361
362
363
364
365 SUMMARY OUTPUT
366
367 Regression Statistics
368 Multiple R 0.947679086289358
369 R Square 0.898095650590232
370 Adjusted R Square 0.896057563602037
 M N O P Q R
371 Standard Error 0.00536906337254
372 Observations 52
373
374 ANOVA
375 df SS MS F Significance F
376 Regression 1 0.0127027 0.0127027 440.656191709 1.895E-26
377 Residual 50 0.0014413 2.883E-05
378 Total 51 0.0141441
379
380 Coefficients Standard Error t Stat P-value Lower 95%
381 Intercept -0.000437899065975 0.0007534 -0.581266 0.56367242033 -0.001951
382 X Variable 1 0.882174060033888 0.0420247 20.991812 1.8945134E-26 0.797765
383
384
385
386
387
388
389
390
391
392
393
394
395
396
397
398
399
400
401
402
403
404
405
406
407
408
409
410
411
412
413 -0.000437899065975 Intercept (b)
414 0.000753353876784 Std. Error of b
415 0.00536906337254 Std. Error of y
416 50 Degrees of freedom
417 0.001441342074917 SS Residual
418
419
 M N O P Q R
420 -0.581266094818789 t-stat for intercept
421 0.563672420329602 Prob of t
422
423
424
425
426
427
428
429
430
431
432
433
434
435
436
437
438
 S T U V

236

237
238
239
240
241
242
243
244
245
246
247
248
249
250
251
252
253
254
255
256
257
258
259
260
261
262
263
264
265
266
267
268
269
270
271
272 F
Significance
273
274
275
276
277 Upper 95%Lower 95.0%Upper 95.0%
278 0.0136539 -0.005155 0.0136539
279 1.5806417 0.5342775 1.5806417
280
281
282
283
284
285
 S T U V
286
287
288
289
290
291
292
293
294
295
296
297
298
299
300
301
302 F
Significance
303
304
305
306
307 Upper 95%Lower 95.0%Upper 95.0%
308 0.001117 -0.001918 0.001117
309 0.9664751 0.797658 0.9664751
310
311
312
313
314
315
316
317
 S T U V
318
319
320
321
322
323
324
325
326
327
328
329
330
331
332
333
334
335
336
337
338
339
340
341
342
343 F
Significance
344
345
346
347
348 Upper 95%Lower 95.0%Upper 95.0%
349 0.0136479 -0.005108 0.0136479
350 1.5797109 0.533456 1.5797109
351
352
353
354
355
356
357
358
359
360
361
362
363
364
365
366
367
368
369
370
 S T U V
371
372
373
374
375 F
Significance
376
377
378
379
380 Upper 95%Lower 95.0%Upper 95.0%
381 0.0010753 -0.001951 0.0010753
382 0.9665831 0.797765 0.9665831
383
384
385
386
387
388
389
390
391
392
393
394
395
396
397
398
399
400
401
402
403
404
405
406
407
408
409
410
411
412
413
414
415
416
417
418
419
SECTION 25-1
SOLUTIONS TO SELF-TEST
Stock A has an expected return of 10 percent and a standard deviation of 35 percent. Stock B has an expected return of 15
percent and a standard deviation of 45 percent. The correlation coefficient between Stock A and B is 0.3. What are the
expected return and standard deviation of a portfolio invested 60 percent in Stock A and 40 percent in Stock B?

Stock A: expected return 10%

Stock A: standard deviation 35%
Stock B: expected return 15%
Stock B: standard deviation 45%
Correlation between A and B 0.30

% portfolio in A
% portfolio in B 60%
40%

Portfolio: expected return 12.0%

Portfolio: standard deviation 31.5%
SECTION 25-4
SOLUTIONS TO SELF-TEST
The standard deviation of stock returns of Park Corporation is 60 percent. The standard deviation of the market return is 20
percent. If the correlation between Park and the market is 0.40, what is Park's beta?

Standard deviation of Park 60%

Standard deviation of market 20%
Correlation between Park and market 0.40

Park's beta 1.20

SECTION 25-7
SOLUTIONS TO SELF-TEST
An analyst has modeled the stock of Brown Kitchen Supplies using a two-factor APT model. The risk-free rate is 5 percent, the
required return on the first factor (r 1) is 10 percent and the required return on the second factor (r 2) is 15 percent. If b1 = 0.5
and b2 = 1.3, what is Brown's required return?

Risk-free rate 5%
r1 10%
r2 15%
b1 0.50
b2 1.30

Brown's required return 20.50%

The Yahoo date is shown as a Monday, but it is actually for the Friday of the week that begins on that Monday. The Fred date is shown as a Friday and is a Friday.

Raw Data Returns

Yahoo Yahoo Yahoo Yahoo Yahoo FRED FRED
SP500 AAPL VMVIX WGS3MO
Date Adj Close Date Adj Close Date Adj Close observation_date Rate Date (Friday)
9/11/2017 2500.22998 9/11/2017 157.498611 9/11/2017 40.48315 2017-09-15 1.04 2017-09-15
9/18/2017 2502.219971 9/18/2017 149.627625 9/18/2017 40.355568 2017-09-22 1.04 2017-09-22
9/25/2017 2519.360107 9/25/2017 151.824387 9/25/2017 40.993423 2017-09-29 1.06 2017-09-29
10/2/2017 2549.330078 10/2/2017 152.986816 10/2/2017 41.35812 2017-10-06 1.06 2017-10-06
10/9/2017 2553.169922 10/9/2017 154.651642 10/9/2017 41.427109 2017-10-13 1.09 2017-10-13
10/16/2017 2575.209961 10/16/2017 153.922668 10/16/2017 41.81152 2017-10-20 1.10 2017-10-20
10/23/2017 2581.070068 10/23/2017 160.621384 10/23/2017 41.417255 2017-10-27 1.11 2017-10-27
10/30/2017 2587.840088 10/30/2017 169.930634 10/30/2017 41.190556 2017-11-03 1.16 2017-11-03
11/6/2017 2582.300049 11/6/2017 172.068298 11/6/2017 41.170845 2017-11-10 1.22 2017-11-10
11/13/2017 2578.850098 11/13/2017 168.218185 11/13/2017 41.51582 2017-11-17 1.26 2017-11-17
11/20/2017 2602.419922 11/20/2017 172.983475 11/20/2017 41.781948 2017-11-24 1.30 2017-11-24
11/27/2017 2642.219971 11/27/2017 169.107971 11/27/2017 42.718319 2017-12-01 1.28 2017-12-01
12/4/2017 2651.5 12/4/2017 167.447037 12/4/2017 43.043587 2017-12-08 1.29 2017-12-08
12/11/2017 2675.810059 12/11/2017 171.994812 12/11/2017 43.092873 2017-12-15 1.32 2017-12-15
12/18/2017 2683.340088 12/18/2017 173.023026 12/18/2017 43.309715 2017-12-22 1.36 2017-12-22
12/25/2017 2673.610107 12/25/2017 167.30864 12/25/2017 43.509964 2017-12-29 1.42 2017-12-29
1/1/2018 2743.149902 1/1/2018 173.013123 1/1/2018 44.293125 2018-01-05 1.41 2018-01-05
1/8/2018 2786.23999 1/8/2018 175.079391 1/8/2018 45.145679 2018-01-12 1.43 2018-01-12
1/15/2018 2810.300049 1/15/2018 176.433853 1/15/2018 45.314209 2018-01-19 1.45 2018-01-19
1/22/2018 2872.870117 1/22/2018 169.562744 1/22/2018 45.988319 2018-01-26 1.43 2018-01-26
1/29/2018 2762.129883 1/29/2018 158.67775 1/29/2018 44.124596 2018-02-02 1.46 2018-02-02
2/5/2018 2619.550049 2/5/2018 154.634201 2/5/2018 42.132004 2018-02-09 1.54 2018-02-09
2/12/2018 2732.219971 2/12/2018 171.167343 2/12/2018 43.837109 2018-02-16 1.60 2018-02-16
2/19/2018 2747.300049 2/19/2018 174.214859 2/19/2018 43.916412 2018-02-23 1.64 2018-02-23
2/26/2018 2691.25 2/26/2018 174.919678 2/26/2018 42.984554 2018-03-02 1.65 2018-03-02
3/5/2018 2786.570068 3/5/2018 178.662048 3/5/2018 44.461651 2018-03-09 1.68 2018-03-09
3/12/2018 2752.01001 3/12/2018 176.716415 3/12/2018 44.015549 2018-03-16 1.75 2018-03-16
3/19/2018 2588.26001 3/19/2018 163.732193 3/19/2018 41.725552 2018-03-23 1.76 2018-03-23
3/26/2018 2640.870117 3/26/2018 166.551392 3/26/2018 42.901299 2018-03-30 1.76 2018-03-30
4/2/2018 2604.469971 4/2/2018 167.147018 4/2/2018 42.483139 2018-04-06 1.74 2018-04-06
4/9/2018 2656.300049 4/9/2018 173.4505 4/9/2018 43.050644 2018-04-13 1.75 2018-04-13
4/16/2018 2670.139893 4/16/2018 164.50647 4/16/2018 43.339371 2018-04-20 1.81 2018-04-20
4/23/2018 2669.909912 4/23/2018 161.131378 4/23/2018 43.458847 2018-04-27 1.85 2018-04-27
4/30/2018 2663.419922 4/30/2018 182.483856 4/30/2018 42.961037 2018-05-04 1.85 2018-05-04
5/7/2018 2727.719971 5/7/2018 187.209 5/7/2018 43.409065 2018-05-11 1.89 2018-05-11
5/14/2018 2712.969971 5/14/2018 185.658875 5/14/2018 43.508629 2018-05-18 1.92 2018-05-18
5/21/2018 2721.330078 5/21/2018 187.920944 5/21/2018 43.528542 2018-05-25 1.92 2018-05-25
5/28/2018 2734.620117 5/28/2018 189.57515 5/28/2018 43.389156 2018-06-01 1.93 2018-06-01
6/4/2018 2779.030029 6/4/2018 191.030029 6/4/2018 44.096046 2018-06-08 1.94 2018-06-08
6/11/2018 2779.659912 6/11/2018 188.180023 6/11/2018 44.096046 2018-06-15 1.94 2018-06-15
6/18/2018 2754.879883 6/18/2018 184.273727 6/18/2018 43.817268 2018-06-22 1.94 2018-06-22
6/25/2018 2718.370117 6/25/2018 184.463074 6/25/2018 43.470001 2018-06-29 1.93 2018-06-29
7/2/2018 2759.820068 7/2/2018 187.31308 7/2/2018 44.110001 2018-07-06 1.97 2018-07-06
7/9/2018 2801.310059 7/9/2018 190.661331 7/9/2018 44.299999 2018-07-13 1.98 2018-07-13
7/16/2018 2801.830078 7/16/2018 190.77095 7/16/2018 44.32 2018-07-20 2.00 2018-07-20
7/23/2018 2818.820068 7/23/2018 190.312546 7/23/2018 44.560001 2018-07-27 2.00 2018-07-27
7/30/2018 2840.350098 7/30/2018 207.263107 7/30/2018 44.790001 2018-08-03 2.03 2018-08-03
8/6/2018 2833.280029 8/6/2018 206.804718 8/6/2018 44.48 2018-08-10 2.06 2018-08-10
8/13/2018 2850.129883 8/13/2018 217.580002 8/13/2018 44.790001 2018-08-17 2.07 2018-08-17
8/20/2018 2874.689941 8/20/2018 216.160004 8/20/2018 45.09 2018-08-24 2.08 2018-08-24
8/27/2018 2901.52002 8/27/2018 227.630005 8/27/2018 45.110001 2018-08-31 2.12 2018-08-31
9/3/2018 2871.679932 9/3/2018 221.300003 9/3/2018 44.669998 2018-09-07 2.14 2018-09-07
9/10/2018 2904.97998 9/10/2018 223.839996 9/10/2018 45.27 2018-09-14 2.15 2018-09-14

Average
std dev
correlation
beta
 intercept
r-squared

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.947679086
R Square 0.898095651
Adjusted R Squ 0.896057564
Standard Error 0.005369063
Observations 52

ANOVA
df SS MS F Significance F
Regression 1 0.012702726 0.012702726 440.656192 1.89451342E-26
Residual 50 0.001441342 2.88268E-05
Total 51 0.014144068

Coefficients Standard Error t Stat P-value Lower 95% Upper 95%Lower 95.0% Upper 95.0%
Intercept -0.0004379 0.000753354 -0.58126609 0.56367242 -0.00195105486 0.0010753 -0.001951 0.0010752567
X Variable 1 0.88217406 0.042024673 20.99181249 1.8945E-26 0.797765019729 0.9665831 0.797765 0.9665831003
shown as a Friday and is a Friday.

SP500 AAPL VMVIX T-bill return Date Adj Close

#REF! #REF! #REF! 0.02000% 53 9/11/2017 40.48315
0.0796% -4.9975% -0.3151% 0.02000% 52 9/18/2017 40.355568 -0.003151
0.6850% 1.4682% 1.5806% 0.02038% 51 9/25/2017 40.993423 0.0158059
1.1896% 0.7656% 0.8896% 0.02038% 50 10/2/2017 41.35812 0.0088965
0.1506% 1.0882% 0.1668% 0.02096% 49 10/9/2017 41.427109 0.0016681
0.8632% -0.4714% 0.9279% 0.02115% 48 10/16/2017 41.81152 0.0092792
0.2276% 4.3520% -0.9430% 0.02135% 47 10/23/2017 41.417255 -0.00943
0.2623% 5.7958% -0.5474% 0.02231% 46 10/30/2017 41.190556 -0.005474
-0.2141% 1.2580% -0.0479% 0.02346% 45 11/6/2017 41.170845 -0.000479
-0.1336% -2.2375% 0.8379% 0.02423% 44 11/13/2017 41.51582 0.0083791
0.9140% 2.8328% 0.6410% 0.02500% 43 11/20/2017 41.781948 0.0064103
1.5293% -2.2404% 2.2411% 0.02462% 42 11/27/2017 42.718319 0.0224109
0.3512% -0.9822% 0.7614% 0.02481% 41 12/4/2017 43.043587 0.0076143
0.9168% 2.7159% 0.1145% 0.02538% 40 12/11/2017 43.092873 0.001145
0.2814% 0.5978% 0.5032% 0.02615% 39 12/18/2017 43.309715 0.005032
-0.3626% -3.3027% 0.4624% 0.02731% 38 12/25/2017 43.509964 0.0046237
2.6010% 3.4096% 1.8000% 0.02712% 37 1/1/2018 44.293125 0.0179996
1.5708% 1.1943% 1.9248% 0.02750% 36 1/8/2018 45.145679 0.019248
0.8635% 0.7736% 0.3733% 0.02788% 35 1/15/2018 45.314209 0.003733
2.2265% -3.8944% 1.4876% 0.02750% 34 1/22/2018 45.988319 0.0148763
-3.8547% -6.4194% -4.0526% 0.02808% 33 1/29/2018 44.124596 -0.040526
-5.1620% -2.5483% -4.5158% 0.02962% 32 2/5/2018 42.132004 -0.045158
4.3011% 10.6918% 4.0471% 0.03077% 31 2/12/2018 43.837109 0.0404705
0.5519% 1.7804% 0.1809% 0.03154% 30 2/19/2018 43.916412 0.001809
-2.0402% 0.4046% -2.1219% 0.03173% 29 2/26/2018 42.984554 -0.021219
3.5419% 2.1395% 3.4363% 0.03231% 28 3/5/2018 44.461651 0.0343634
-1.2402% -1.0890% -1.0033% 0.03365% 27 3/12/2018 44.015549 -0.010033
-5.9502% -7.3475% -5.2027% 0.03385% 26 3/19/2018 41.725552 -0.052027
2.0326% 1.7218% 2.8178% 0.03385% 25 3/26/2018 42.901299 0.0281781
-1.3783% 0.3576% -0.9747% 0.03346% 24 4/2/2018 42.483139 -0.009747
1.9900% 3.7712% 1.3358% 0.03365% 23 4/9/2018 43.050644 0.0133584
0.5210% -5.1565% 0.6707% 0.03481% 22 4/16/2018 43.339371 0.0067067
-0.0086% -2.0516% 0.2757% 0.03558% 21 4/23/2018 43.458847 0.0027568
-0.2431% 13.2516% -1.1455% 0.03558% 20 4/30/2018 42.961037 -0.011455
2.4142% 2.5893% 1.0429% 0.03635% 19 5/7/2018 43.409065 0.0104287
-0.5407% -0.8280% 0.2294% 0.03692% 18 5/14/2018 43.508629 0.0022936
0.3082% 1.2184% 0.0458% 0.03692% 17 5/21/2018 43.528542 0.0004577
0.4884% 0.8803% -0.3202% 0.03712% 16 5/28/2018 43.389156 -0.003202
1.6240% 0.7674% 1.6292% 0.03731% 15 6/4/2018 44.096046 0.0162919
0.0227% -1.4919% 0.0000% 0.03731% 14 6/11/2018 44.096046 0
-0.8915% -2.0758% -0.6322% 0.03731% 13 6/18/2018 43.817268 -0.006322
-1.3253% 0.1028% -0.7925% 0.03712% 12 6/25/2018 43.470001 -0.007925
1.5248% 1.5450% 1.4723% 0.03788% 11 7/2/2018 44.110001 0.0147228
1.5034% 1.7875% 0.4307% 0.03808% 10 7/9/2018 44.299999 0.0043074
0.0186% 0.0575% 0.0451% 0.03846% 9 7/16/2018 44.32 0.0004515
0.6064% -0.2403% 0.5415% 0.03846% 8 7/23/2018 44.560001 0.0054152
0.7638% 8.9067% 0.5162% 0.03904% 7 7/30/2018 44.790001 0.0051616
-0.2489% -0.2212% -0.6921% 0.03962% 6 8/6/2018 44.48 -0.006921
0.5947% 5.2104% 0.6969% 0.03981% 5 8/13/2018 44.790001 0.0069694
0.8617% -0.6526% 0.6698% 0.04000% 4 8/20/2018 45.09 0.0066979
0.9333% 5.3063% 0.0444% 0.04077% 3 8/27/2018 45.110001 0.0004436
-1.0284% -2.7808% -0.9754% 0.04115% 2 9/3/2018 44.669998 -0.009754
1.1596% 1.1478% 1.3432% 0.04135% 1 9/10/2018 45.27 0.0134319

15.8523% 38.8605% 11.9014% 1.6469% r square 0.8980744

0.1289909 0.2739536 0.1200616 0.0004774
1 0.4979043 0.9476679 -0.030293
1 1.0574596 0.8820666
0 0.0042495 -0.0004
0.2479087 0.8980744