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    Capm in Excel

    Uploaded by

    Jagr
    The document discusses calculating the required return on Riyad Bank stock using the Capital Asset Pricing Model (CAPM). It provides the CAPM formula and defines the terms. It then shows the process of gathering stock price data for Riyad Bank and a market index fund, calculating returns, and determining beta. Beta is found to be 0.881, indicating Riyad Bank is less risky than the overall market. The risk-free rate is also determined. Putting all the terms together into the CAPM formula results in a negative required return for Riyad Bank, reflecting the overall market conditions, but lower than the market due to the stock's lower risk.

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    Capm in Excel

    Uploaded by

    Jagr
    131 views31 pages
    The document discusses calculating the required return on Riyad Bank stock using the Capital Asset Pricing Model (CAPM). It provides the CAPM formula and defines the terms. It then shows the process of gathering stock price data for Riyad Bank and a market index fund, calculating returns, and determining beta. Beta is found to be 0.881, indicating Riyad Bank is less risky than the overall market. The risk-free rate is also determined. Putting all the terms together into the CAPM formula results in a negative required return for Riyad Bank, reflecting the overall market conditions, but lower than the market due to the stock's lower risk.

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    CAPM

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    The document discusses calculating the required return on Riyad Bank stock using the Capital Asset Pricing Model (CAPM). It provides the CAPM formula and defines the terms. It then shows the process of gathering stock price data for Riyad Bank and a market index fund, calculating returns, and determining beta. Beta is found to be 0.881, indicating Riyad Bank is less risky than the overall market. The risk-free rate is also determined. Putting all the terms together into the CAPM formula results in a negative required return for Riyad Bank, reflecting the overall market conditions, but lower than the market due to the stock's lower risk.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    131 views31 pages

    Capm in Excel

    Uploaded by

    Jagr
    The document discusses calculating the required return on Riyad Bank stock using the Capital Asset Pricing Model (CAPM). It provides the CAPM formula and defines the terms. It then shows the process of gathering stock price data for Riyad Bank and a market index fund, calculating returns, and determining beta. Beta is found to be 0.881, indicating Riyad Bank is less risky than the overall market. The risk-free rate is also determined. Putting all the terms together into the CAPM formula results in a negative required return for Riyad Bank, reflecting the overall market conditions, but lower than the market due to the stock's lower risk.

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    You are on page 1of 31

    The Capital Asset Pricing Model

    Where:
    Re = the return required by investors on a stock

    R m
    = the average return on the market

    R f = the return on risk free investments


    = the stocks market risk (how sensitive the stock is to
    fluctuating in the market )
    Calculating the Required Return on
    Riyad Bank using CAPM
    Data Needed:
    1. Share prices of Riyad Bank to calculate the company
    return (RRiyadbank )
    2. Share prices of Tadawul All Shares Index (TASI)to
    calculate the market return ( R m )
    3. The return on risk free investments ( R f )

    The data in this example were acquired from


    Bloomberg
    Daily Closing Prices of Riyad Bank
    and TASI in 2008
    Calculating the Stock Return
    Calculating the Market Return
    Riyad Bank and TASI Daily Returns
    Calculating the Average Market
    Return
    The Average Market Return
    We simply take the sum of the returns and divide them
    by the number of observations.

    TASI average daily return= -0.003 = -0.3%


    Calculating Beta Method 1
    Calculating Beta Method 1
    Calculating Beta Method 1
    Calculating Beta Method 1

    However, this method does not tell if is statically


    significant or not.
    Calculating Beta method 2
    You need to make sure you have Excel Add- Ins already
    installed. In particular, Analysis Tool Pack.

    You can find Excel Add-Ins in by clicking on file. Then,


    at the bottom, choose Excel Add-Ins.

    Then choose Analysis Tool Pack and press ok.


    Calculating Beta method 2
    Calculating Beta method 2
    Calculating Beta method 2
    Calculating Beta method 2
    Statistical Significance
    Null Hypothesis ( H ):
    0

    There is no difference between groups. We assume the null


    hypothesis is correct until we have enough evidence to
    reject it. Regarding Beta, the stock is not affected by
    changes (fluctuations ) in the Market.

    Alternative Hypothesis( H ):
    A

    There is a difference between groups. Regarding Beta, the


    stock is affected by changes (fluctuations ) in the Market.
    Statistical Significance
    The null hypothesis ( ) in this example:
    H 0

    H : Riyad Bank has no relationship with the market return.


    0
    Its returns do not get affected by the market fluctuation.

    The alternative hypothesis ( H A ) in this example:


    H A : Riyad Bank has a relationship with the market.
    Its returns fluctuate as the market fluctuates.
    P- Value
    We use the P- value to determine if our Beta is statically
    significant.
    If P- value < 0.01 is statically significant
    at the 99% level (strong).

    If P- value < 0.05 is statically significant at


    the 95% level.

    If P- value < 0.1 is statically significant at


    the 90% level (weak).
    Beta and the P-Value of Riyad Bank
    = 0.881 P-Value= 3.77E-45

    P-value< 0.01 is statically significant at the level 99%.

    We reject the H 0 .

    We are 99% confident that Riyad returns are affected by the market.

    The Coefficient sign is positive Riyad Banks returns has a


    positive relationship with the market returns. If market return increases,
    Riyad Banks returns increases and vise versa.

    .
    Interpreting Beta
    If R m increase by 1% R
    Riyadbank increase by 0.881%

    If R m increase by 2% R riyadbank increase by 1.761 %


    R m

    (2 X 0.881 %)

    If R m decrease by 5% R riyadbank decrease by 4.403%


    (5 X 0.881 %)
    Interpreting Beta
    Beta of the market is always = 1.0
    If the stock beta > 1.0, the stock is more risky than
    average
    If stock beta < 1.0, the stock is less risky than average
    Thus, Riyad Bank is less risky than average:
    0.8177 < 1.0
    Thus, when the average return on TASI is negative
    -0.003, the return on Riyad Bank must be negative
    as well. However, lower in magnitude.
    Compare Beta with Analysts
    report
    Get the Risk Free Return
    Get the Risk Free Return
    Calculating the Required Return on
    Riyad Bank using CAPM
    Required Return on Riyad Bank
    using CAPM
    Results Interpretation
    The required return on Riyad is in negative because
    the market return is in negative. This is because Riyad
    Bank is has a positive relationship with the market
    returns. However, the decrease is lower in magnitude
    because is lower than 1.0 which means Riyad Bank is
    less risky.
    Thanks for Listening

    Prepared by:
    Rawaa Muhandes
    Rawaa_86@hotmail.com

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