CAPM and APT - Corresponding Descriptive Statistics - Standard Deviation - Economics Assignment Help

Assignment Task:

CAPM and APT Economics Assignment Help

Q1. We download adjusted daily closing price of S& P500 index from January 1970 to July 2009. In total we have 8991 observations of prices.
a) Using the adjusted daily closing price, how should we compute the annualized return during the period between Jan 1 st 2001 and Mar 1 st 2003?

b) After obtaining the daily returns, we compute the corresponding descriptive statistics: Standard Deviation = 0.02084, Skewness = -2.083, Kurtosis = 32.91.
What can you tell from above statistics about the potential distribution of returns? Is the S & P500 return in our sample normally distributed? Please provide evidence
to support your claim.

c) Let’s assume firms in S& P500 nicely represent all the firms in the market, and we will use S & P500 return as proxy for market portfolio return. We want to predict future market returns. Please explain in details what should we do.

d) Approach in c) is not perfect. Please point out why and what could be improved.
 

Q2. CAPM and APT are two important attempts in the finance literature to explain the expected return of a financial asset.

a) CAPM and APT have their own assumptions. Please write down the assumptions for CAPM and for APT.

b) Please explain in detail why CAPM and APT have different assumptions. In other words, why CAPM has certain assumptions that APT does not, and why APT has
certain assumptions that CAPM does not.

c) Derive the CAPM.

d) Similar to the multifactor pricing model based on APT, ICAPM is also a multifactor pricing model. Please explain the difference between these two models
in details.

e) FM is the commonly used asset pricing test methods. If we would like to test CAPM using observations of stock returns in Chinese market from 1990 to 2015,
what are the steps we need to do to perform the test? And what is our null hypothesis? Please explain in details.

Q3. Company A has been listed on NYSE since 1940 and started to pay out around 50% of earnings as dividend since 1960. In 2016, the average risk-averse investors requires 10% return per year to compensate for the risks to hold stocks/bonds of firms with similar size, book to market ratio, industry, and age as Company A.

a) In 2016 the price-earnings ratio for the company is 42. If the firm doesn’t change dividend policy and its risk-exposure won’t change much in the future, what do the
investors in 2016 expect the dividend growth to be?

b) Company A has been issuing corporate bond with $100 face value at maturities since 1960. The bond pays out 5% of its face value at the end of each year until the
maturity. Please calculate the theoretical price for the bonds that will mature at the end of year 2017, 2018, 2019, 2020, and 2021.

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