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Professors video instructions if the written instructions are confusing. Class Info - https://youtu.be/ZR-4aizf5bE Excel Info - Infohttps://youtu.be/t4Hy-lj4jjY Project 6 Assignment Info -...

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Professors video instructions if the written instructions are confusing.

Class Info - https://youtu.be/ZR-4aizf5bE

Excel Info - Infohttps://youtu.be/t4Hy-lj4jjY

Project 6 Assignment Info - https://youtu.be/1XgGq2u0es4


Background: CAPM and Regression in Excel

The Capital Asset Pricing Model computes the expected return of a given stockbased on the risk-free rate (Rf), the expected return of the market (Rm), and Beta(B).Often to implement the CAPM, we use an index model and thus use realized/historical returns. Given that the CAPM is a statement about expected returns, the index model can be modified to reflect this.

The CAPM decomposes a stock’s variability into market (systematic) risk and firm-specific effects that can be diversified away.



Answered Same Day May 29, 2021

Solution

Neenisha answered on May 30 2021
131 Votes
1. What is CAPM and Why is it important?
CAPM is Capital Asset Pricing Model which is used for Calculation of Cost of Equity and Beta. It escribes the relation between the systematic risk (Beta) and the required return.
According to CAPM,
Expected Return = Risk Free Return + Beta * Market Risk Premium
CAPM model is important as it is used by the investors to analyse the fair value of the stock and compare it with the time value of money.
2. What is rf and why is it important?
Rf is the Risk Free rate which can be earned by the investors by putting the money in banks or government bonds. It is important because every investor wants to earn more than the risk free rate to maximize the returns. It helps in comparison with the required return over the risk free return considering the risk involved in the market.
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