...Risk and return nexus in Malaysian stock market : Empirical evidence from CAPM SUMMARY From my review for this paper which is Risk and Return Nexus in Malaysian Stock Market : Empirical Evidence from CAPM before this, actually this paper examines the applicability of Capital Asset Pricing Model (CAPM) in explaining the risk-return relation in the Malaysian stock market for the period of January 1995 to December 2006. The test using linear regression method, was carried out on four models : the standard CAPM model with constant beta (Model I), the standard CAPM model with time-varying beta (Model II), the CAPM model conditional on segregating positive and negative market risk premiums with constant beta (Model III), as well as the CAPM model conditional on segregating positive and negative market risk premiums with time varying beta (Model IV). Empirical results indicate that both the standard CAPM models (Model I and Model II) are statistically insignificant. However, the CAPM models conditional on segregating positive and negative market risk premiums (Model III and Model IV) are statistically significant. In addition, this study also discovers that time varying beta provides better explanatory power. Then from the literatures that i have gone through, it can be concluded that there is no one model that can claim to have the absolute ability to predict the expected stock return. While some researchers are questioning CAPM and in favor of Fama and French (1993) three...
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...Beta (finance) From Wikipedia, the free encyclopedia Jump to: navigation, search In finance, the Beta (β) of a stock or portfolio is a number describing the volatility of an asset in relation to the volatility of the benchmark that said asset is being compared to. This benchmark is generally the overall financial market and is often estimated via the use of representative indices, such as the S&P 500.[1] An asset has a Beta of zero if its returns change independently of changes in the market's returns. A positive beta means that the asset's returns generally follow the market's returns, in the sense that they both tend to be above their respective averages together, or both tend to be below their respective averages together. A negative beta means that the asset's returns generally move opposite the market's returns: one will tend to be above its average when the other is below its average.[2] It measures the part of the asset's statistical variance that cannot be removed by the diversification provided by the portfolio of many risky assets, because of the correlation of its returns with the returns of the other assets that are in the portfolio. Beta can be estimated for individual companies using regression analysis against a stock market index. Contents[hide] * 1 Definition * 1.1 Security market line * 2 Choice of benchmark * 3 Investing * 4 Academic theory * 5 Multiple beta model * 6 Estimation of beta * 7 Extreme and interesting cases * 8 Criticism...
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...Ahmed Aman Yousoof | 0930274530 | Yakin Reza | 0930042030 | Naima Rahman | 0930283030 | Date of Submission: August 08, 2012 TABLE OF CONTENTS | | | Executive Summary | 03 | Introduction | 04 | Objective | 04 | Asset Allocation | 05 | Macroeconomic & Industrial Scene | 07 | Diversification | 07 | Trading Strategies & Economic Rationale for Selecting Stocks | 07 | Portfolio Performance | 10 | Holding Period Return | 13 | Portfolio Risk & Return | 14 | Security Market Line | 15 | Lessons Learned from Trading | 16 | Conclusion | 17 | References | 18 | Appendix | 19 | Executive Summary The investment simulation project is a fictitious investment in the Dhaka Stock Exchange that started from June 4, 2012 and ended on August 01, 2012 over a period of two months and separated in three phases. The initial investment in the portfolio was around BDT 1,000,000. The objective of the project was to maximize the after tax wealth through a well diversified portfolio. Given the consistent market fall at the Dhaka Stock Exchange since our investment period, we could not profit from the investment, nevertheless, we were able to improve performance over time with the help of the knowledge on finance and investment. In the first phase (June 4 – June 21) of the project we invested the amount totaling to BDT 999,203 in 15 companies from 11 different...
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...new information. Thus, price changes would be independent and random. Finally, because stock prices reflect all information, one would expect prevailing prices to reflect “true” current value. Capital markets as a whole are generally expected to be efficient, but the markets for some securities might not be as efficient as others. Recall that markets are expected to be efficient because there are a large number of investors who receive new information and analyze its effect on security values. If there is a difference in the number of analysts following a stock and the volume of trading, one could conceive of differences in the efficiency of the markets. For example, new information regarding actively traded stocks such as IBM and Exxon is well publicized and numerous analysts evaluate the effect. Therefore, one should expect the prices for these stocks to adjust rapidly and fully reflect the new information. On the other hand, new information regarding a stock with a small number of stockholders and low trading volume will not be as well publicized and few analysts follow such firms. Therefore, prices may not adjust as rapidly to new information and the possibility of finding a temporarily undervalued stock are also greater. Some also argue that the size of the firms is another factor to differentiate the efficiency of stocks. Specifically, it is believed that the markets for stocks of small...
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...investor the right to sell their stock for the strike price. Buying a call turned out to be our best trade so far in the game. We purchased Exxon mobile with a strike price of $65, meaning that our option would not start to payoff until the stock price rose above this strike price as indicated in the graph. But remember, the profit of our option would be below the blue line by the amount that we paid for the option, in the case of Exxon mobile, the profit amount would be $5.70 lower. So now lets take a look at how the payoff for the long call on Exxon mobile worked out for us… Slide 2 As you may recall, in order to have a positive payoff the stock price, St, must be higher than the exercise price, X. So in our case, Exxon mobile had a stock price of 73.15 when we sold our option meaning that our payoff was positive. The payoff equaled the stock price at our selling point, minus the exercise price of $65. Therefore the payoff was $8.15 per stock. However, remember that our profit would have been lower by the amount we paid for our option, making our profit equal $2.45 per stock, which seems significantly lower than our payoff. But taking into account commissions our holding period return was still 39.45%. Not too bad for a week’s work! Slide 3 One of the surprises we experienced in the challenge was using a protective put for the China Medical Technologies stock. A protective put involves buying a stock and a put option on the same stock. We chose to use a protective...
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...PAWEL BILINSKI AND DANIELLE LYSSIMACHOU b1 The Risk Interpretation of the CAPM’s Beta: Evidence from a New Research Method This study tests the validity of using the CAPM beta as a risk control in cross-sectional accounting and finance research. We recognize that high risk stocks should experience either very good or very bad returns more frequently compared to low risk stocks, i.e. high risk stocks should cluster in the tails of the cross-sectional return distribution. Building on this intuition, we test the risk interpretation of the CAPM’s beta by examining if high beta stocks are more likely than low beta stocks to experience either very high or very low returns. Our empirical results indicate that beta is a strong predictor of large positive and large negative returns, which confirms that beta is a valid empirical risk measure and that researchers should use beta as a risk control in empirical tests. Further, we show that because the relation between beta and returns is U-shaped, i.e. high betas predict both very high and very low returns, linear cross-sectional regression models, e.g. Fama-MacBeth regressions, will fail on average to reject the null hypothesis that beta does not capture risk. This result explains why previous studies find no significant cross-sectional relation between beta and returns. Key words: Market beta; New research method; Empirical accounting and finance research. PAWEL BILINSKI (pawel.bilinski.1@city.ac.uk) and DANIELLE LYSSIMACHOU...
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...INTRODUCTION The emergence of the market for derivative products, most notably forwards, futures and options, can be traced back to the willingness of risk-averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. By their very nature, the financial markets are marked by a very high degree of volatility. Through the use of derivative products, it is possible to partially or fully transfer price risks by locking-in asset prices. As instruments of risk management, these generally do not influence the fluctuations in the underlying asset prices. However, by locking in asset prices, derivative products minimize the impact of fluctuations in asset prices on the profitability and cash flow situation of riskaverse investors. The main function of derivatives is that they allow users to meet the demand for costeffective protection against risks associated with movements in the prices of the underlying. In other words, users of derivatives can hedge against fluctuations in exchange and interest rates, equity and commodity prices, as well as credit worthiness. Specifically, derivative transactions involve transferring those risks from entities less willing or able to manage them to those more willing or able to do so. Derivatives transactions are now common among a wide range of entities, including commercial banks, investment banks, central banks, fund mangers, insurance companies and other non-financial corporations. Participants...
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...liquidity risk of stocks in two retail-based equity markets, China and Taiwan during the period of 1996-2008. We found that the proportion of liquidity risk overwhelms market risk, unlike the findings in US markets. As a pricing factor, the evidence indicated that systematic liquidity risk was more important than market risk in Taiwan. In China, crosssectional differences in individual firm liquidity explained differences in returns. JEL codes: G12, G15 Key Words: Asset Pricing, Liquidity Risk, Emerging Markets 1. Introduction The diversity of liquidity features and their importance in asset pricing have been an active area of research. The main conclusions drawn from existing works are that there exists commonality in liquidity (Chordia et al., 2000, Huberman and Halka, 2001, Hasbrouck and Seppi, 2001) and that investors demand premium from illiquidity (Amihud and Mendelson, 1986, Brennan and Subrahmanyam, 1996, Datar et al., 1998, Amihud, 2002). What is less understood is the relative importance of market risk to liquidity risk. In an attempt to shed light on this issue, Acharya and Pedersen (2005) used an equilibrium model as a framework to measure possible channels of liquidity risk. Although the authors found their ―Liquidity Adjusted Asset Pricing Model‖ provided a better fit than the standard capital asset pricing model, they found only weak evidence that liquidity risk was more important than market risk in U.S. data. The result of U.S. stock market study may not...
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...Stock Market Analysis: MANG 6221 Professor Dr. Marta Degl'Innocenti Assignment Length: 3,155 words (Excluding Endnote, Graph, Appendix and Reference) By Group Niagara Waterfall Thanat Pojkasemsin 25390422 Kanchana Leeratsatien 25088866 Leena Phaerakkakit 25712756 Synthia Manik 25665286 Jingwen Liu 25402323 Part A Introduction With the development of financial market, the technical analysis tools play an important role for the security evaluation. According to Penman (2010), investors estimate the stock future prices and trends by collecting and estimate the past prices and information. However, there are some conflict points on the momentum strategies performance, and it is a technical tool with multiple economy factors needs to be considered into. Why do momentum strategies exist? Refer to both behavioural and market-based argumentations. Momentum strategies are the stock analysis stool exists in the financial evaluation process, also in funds and currency investment. According to Chan, Jegadeesh, and Lakonishok J (1996) said, "it is a strategy that buying stocks in a high returns over the past three to twelve months, and selling those that had the poor returns over the same period." In the other words, the outperform stock will remain well...
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...Capital Asset Pricing Model: The Indian Context R Vaidyanathan T he Capital Asset Pricing model is based on two parameter portfolio analysis model developed by Markowitz (1952). This model was simultaneously and independently developed by John Lintner (1965), Jan Mossin (1966) and William Sharpe (1964). In equation form the model can be expressed as follows: E (Ri) = Rf + (i [E(rm) – Rf] = Rf +(im / (m (E(Rm) – Rf / (m) Where E(Ri) is expected return on asset i, Rf is the risk-free rate of return, E(Rm) is expected return on market proxy and (i; is a measure of risk specific to asset i. This relationship between expected return on asset i and expected return on market portfolio is also called the security market line. If CAPM is valid, all securities will lie in a straight line called the security market line in the E(R), (i frontier. The security market line implies that return is a linearly increasing function of risk. Moreover, only the market risk affects the return and the investor receive no extra return for bearing diversifiable (residual) risk. The set of assumptions employed in the development of the CAPM can be summarized as follows [Sears and Trennepohl (1993)]: 1. Investors are risk-averse and they have a preference for expected return and a dislike for risk. 2. Investors make investment decisions based on expected return and the variances of security returns, i.e. two-parameter utility function...
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...Definition of 'Marketing' The activities of a company associated with buying and selling a product or service. It includes advertising, selling and delivering products to people. People who work in marketing departments of companies try to get the attention of target audiences by using slogans, packaging design, celebrity endorsements and general media exposure. The four 'Ps' of marketing are product, place, price and promotion. Definition of 'Kiosk' A small, temporary, standalone booth used in high-foot-traffic areas for marketing purposes. A kiosk will usually be manned by one or two individuals who help attract attention to the booth to get new customers. Investopedia explains 'Kiosk' Because of their small, temporary nature, kiosks can be a low-cost marketing strategy. They are also a good way to give a company a human face, and provide customers the opportunity to ask questions about a product. For example, a local newspaper might set up a kiosk at a grocery store to try to sign up new subscribers. Similarly, credit card companies often set up kiosks in airports to seek new customers for a credit card that offers frequent-flyer miles. Investopedia explains 'Marketing' Many people believe that marketing is just about advertising or sales. However, marketing is everything a company does to acquire customers and maintain a relationship with them. Even the small tasks like writing thank-you letters, playing golf with a prospective client, returning calls promptly and...
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...to ____ earnings per share in order to value the firm's stock. | | | | | Selected Answer: | b. firm's; industry | Correct Answer: | d. average industry; firm's | | | | | * Question 2 1 out of 1 points | | | If security prices fully reflect all market-related information (such as historical price patterns) but do not fully reflect all other public information, security markets are | | | | | Selected Answer: | a. weak-form efficient. | Correct Answer: | a. weak-form efficient. | | | | | * Question 3 0 out of 1 points | | | Boris stock has an average return of 15 percent. Its beta is 1.5. Its standard deviation of returns is 25 percent. The average risk-free rate is 6 percent. The Sharpe index for Boris stock is | | | | | Selected Answer: | c. 0.45. | Correct Answer: | b. 0.36. | | | | | * Question 4 0 out of 1 points | | | Until recently, international trading of stocks was limited by | | | | | Selected Answer: | a. transaction costs. | Correct Answer: | d. all of the above | | | | | * Question 5 0 out of 1 points | | | The standard deviation of a stock's returns is used to measure a stock's | | | | | Selected Answer: | a. beta. | Correct Answer: | b. volatility. | | | | | * Question 6 0 out of 1 points | | | A ____ is a trading platform on a computer web site that allows investors to trade stocks without the use of a broker. | | | | | Selected...
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...counting on? * DFA believes in three principles: 1. The Efficient Market Theory. That is, the stock market is efficient and no one has the ability to consistently pick stocks that will beat the market. Over any given period, some lucky investors will outperform the market while others will underperform. DFA felt that the market price of any firm’s stock incorporated all public information and therefore did not do any fundamental analysis on the firm in question. 2. The value of sound academic research. For example, DFA’s founders believed that small-stock investing could yield high returns to investors. They formulated this belief on the Ph.D. dissertation research of Rolf Banz of the University of Chicago, which showed that small stocks had consistently outperformed large stocks between 1926 and the late 1970s. 3. The ability of skilled traders to contribute to a fund’s profits even when the investment is inherently passive. DFA’s investment fund had a semi-active strategy between those of actively managed funds and those of pure index funds. * DFA counts on market behavior that reflects the following concepts: 1. The Beta is Dead. Stocks with high-beta do not have consistently higher returns than low-beta stocks. That is, greater risk does not guarantee greater reward. 2. The Size Effect (Small Minus Big). Based on the research that small stocks historically outperform large ones, DFA strategically built a micro-cap portfolio (9th and 10th NYSE...
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...Corporate Finance Arguably, the role of a corporation's management is to increase the value of the firm to its shareholders while observing applicable laws and responsibilities. Corporate finance deals with the strategic financial issues associated with achieving this goal, such as how the corporation should raise and manage its capital, what investments the firm should make, what portion of profits should be returned to shareholders in the form of dividends, and whether it makes sense to merge with or acquire another firm. Balance Sheet Approach to Valuation If the role of management is to increase the shareholder value, then managers can make better decisions if they can predict the impact of those decisions on the firm's value. By observing the difference in the firm's equity value at different points in time, one can better evaluate the effectiveness of financial decisions. A rudimentary way of valuing the equity of a company is simply to take its balance sheet and subtract liabilities from assets to arrive at the equity value. However, this book value has little resemblance to the real value of the company. First, the assets are recorded at historical costs, which may be much greater than or much less their present market values. Second, assets such as patents, trademarks, loyal customers, and talented managers do not appear on the balance sheet but may have a significant impact on the firm's ability to generate future profits. So while the balance sheet method is simple...
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...FIN 922 – Investment Management In this report we shall discuss three companies which are listed in various exchanges in the U.S and conduct an event study and make a consensus on their responsiveness to an Earnings Surprise. We also need to establish a relationship between the Market Index and the Stock in itself. This relationship can be determined by running a regression and using the Market as the independent variable and the Stock as the dependent variable. In order to analyze the responsiveness of a stock, we need to understand and imply the concept of the beta. The beta is a measure of the volatility, or systematic risk, or a portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing model (CAPM), a model that calculates the expected return of an asset based on its beta and expected market returns. Beta is calculated using regression analysis and you can think of beta as the tendency of a security’s returns to respond to swings in the market. A beta of less than 1 means that the security will be less volatile than the market. Now, we are going to conduct an event study for 3 companies. 1.) Parker Drilling 2.) Autobytel Inc. 3.) Auxilium Pharmaceuticals, Inc. 1. Parker Drilling Company Introduction Parker Drilling is part of the Oil & Gas Equipment & Services industry. The company was founded in 1934 and is headquartered in Houston, Texas. Parker Drilling specializes in barge drilling, onshore drilling...
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