In this assignment, you are to estimate a security market line. You have current information about beta and expected annual return on 5 assets, as given in the following table:
Beta
Expected return
0.25
0.03
0.5
0.05
0.8
0.075
1.25
0.125
1.5
0.15
(Note that expected return is a decimal, so the first asset has an expected return of 3.0%.)
Please do the following and turn in a 2-4 page, double-space typed report to answer the following:
Run a regression line to determine the slope and y-intercept of the security market line. If you need help figuring out the regression line to run, you can refer to Chapter 11 and find the graph that shows this. Include a printout of the regression work done as an appendix (which will not count against the 4-page limit). You can use any computer program you want to run your regression.
Explain how to interpret your regression, including what the slope and y-intercept mean in terms we have used in this class. Calculate 95% confidence intervals for the slope and y-intercept. (Note: Even if a computer printout shows a 95% confidence interval, you must still show how it was calculated.)
Look up the current return on one-year Treasury bills/notes as your risk-free rate. Two good sources are http://fxtrade.oanda.com/analysis/economic-indicators/united-states/rates/yield-curve and http://online.wsj.com/mdc/public/page/mdc_bonds.html. In your report, please state your source and the date used.
Given the current risk-free rate, does the regression estimate of your risk-free rate match the actual current risk-free rate? Use confidence intervals to help answer this question.
What is the current expected market rate of return (based on your regression)?
Please show all of your work and/or explain how you get your answers. If you use a statistical package to calculate any of the above answers, you still need to show how these numbers are calculated in your report.