FINA3010 HW2: Empirical analysis – CAPM application (Due on Nov 27th) Try your best even if you cannot get right beta; this is a real-life application for what we learned. Download the historical s

FINA3010 HW2: Empirical analysis – CAPM application (Due on Nov 27th)

Try your best even if you cannot get right beta; this is a real-life application for what we learned.

Download the historical stock price data of a firm (you can choose any firm you like) and S&P500 (which is the average market price) from Yahoo finance or other public source. Download the dairy yield of 1 year (US T-bill rate) from the Department of US Treasury. You could choose any length of period, but it must be longer than three months. Using those data to estimate the CAPM beta of the firm you choose and clearly state your CAPM model equation.

Upload the EXCEL worksheet and your explanation or other work that you think helps.

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Hint:

To solve the CAPM, you should get ri = firm rate of return, rm = market rate of return, rrf = risk-free rate or T-bill rate. Then use those rates to run regression in excel and find the beta. And return of stock on time t: rt = , where P is the stock price.)

For example:

You want to estimate Market risk (beta) for Lululemon in using current year (2020) data.

Before you are starting, you should get the three types of data (in bold): 

            Lululemon stock daily price from 2020/01/01 to 2020/11/01;

            S&P 500 daily price (market price) from 2020/01/01 to 2020/11/01;

1-year T-bill rate from 2020/01/01 to 2020/11/01.

As we need to find stock return and market return for CAPM model, so we need to use the daily price to find daily return.

Keep solving, you will get the stock return and market return from 2020/01/02 to 2020/11/01.  (As the 1-year T-bill rate is the rate of return in percentage format. To keep consistent-- daily stock or market return should time 100.)

For now you will have stock return (Rlululemon), market return (Rmarket ) and T-bill return ( Rrf ) in same format.

According to the CAPM, Ri = Rrf + (Rm - Rrf) * Beta. If we want to find beta, we need run the regression between Ri -Rrf and Rm - Rrf. So creating two columns, one is [Rlululemon - Rrf]; another is [Rmarket - Rrf]. 

Finally, using the data analysis tool in excel to run regression. You will get your stock beta!!!