1.

Calculate the monthly excess returns, rm rf , on the market portfolio

2. MSFT is not currently paying dividend. The closing price in December 1990 (adjusted for stock
splits) was $ 16.72. calculate the monthly excess returns , rMSFT rf, on Microsoft common
stock.
Ans 1 & 2:

Month
12/90

MSFT Closing Price

($)
16.72

Month
1/91
2/91
3/91
4/91
5/91
6/91
7/91
8/91
9/91
10/91
11/91
12/91
1/92
2/92
3/92
4/92
5/92
6/92
7/92
8/92
9/92
10/92
11/92
12/92
1/93
2/93
3/93
4/93
5/93

MSFT Closing Price Market

($)
return
21.81
4.42%
23.06
7.16%
23.58
2.38%
22.00
0.28%
24.39
4.28%
22.71
-4.57%
24.50
4.68%
28.42
2.35%
29.67
-1.64%
31.29
1.34%
32.42
-4.04%
37.08
11.43%
40.00
-1.86%
41.17
1.28%
39.50
-1.96%
36.75
2.91%
40.33
0.54%
35.00
-1.45%
36.00
4.03%
37.13
-2.02%
40.25
1.15%
44.38
0.36%
46.56
3.37%
42.69
1.31%
43.25
0.73%
41.69
1.35%
46.25
2.15%
42.75
-2.45%
46.31
2.70%

T-Bill
Return
0.52%
0.48%
0.44%
0.53%
0.47%
0.42%
0.49%
0.46%
0.46%
0.42%
0.39%
0.38%
0.34%
0.28%
0.34%
0.32%
0.28%
0.32%
0.31%
0.26%
0.26%
0.23%
0.23%
0.28%
0.23%
0.22%
0.25%
0.24%
0.22%

rm-rf
3.90%
6.68%
1.94%
-0.25%
3.81%
-4.99%
4.19%
1.89%
-2.10%
0.92%
-4.43%
11.05%
-2.20%
1.00%
-2.30%
2.59%
0.26%
-1.77%
3.72%
-2.28%
0.89%
0.13%
3.14%
1.03%
0.50%
1.13%
1.90%
-2.69%
2.48%

rmsftrf
30.4%
5.7%
2.3%
-6.7%
10.9%
-6.9%
7.9%
16.0%
4.4%
5.5%
3.6%
14.4%
7.9%
2.9%
-4.1%
-7.0%
9.7%
-13.2%
2.9%
3.1%
8.4%
10.3%
4.9%
-8.3%
1.3%
-3.6%
10.9%
-7.6%
8.3%

6/93
7/93
8/93
9/93
10/93
11/93
12/93
1/94
2/94
3/94
4/94
5/94
6/94
7/94
8/94
9/94
10/94
11/94
12/94
1/95
2/95
3/95
4/95
5/95
6/95
7/95
8/95
9/95
10/95
11/95
12/95

44.00
37.00
37.56
41.25
40.06
40.00
40.31
42.56
41.25
42.35
46.25
53.75
51.63
51.50
58.13
56.13
63.00
62.88
61.13
59.38
63.00
71.13
81.75
84.69
90.38
90.50
92.50
90.50
100.00
87.13
87.75

0.33%
-0.47%
3.81%
-0.74%
2.03%
-0.94%
1.23%
3.35%
-2.70%
-4.35%
1.30%
1.63%
-2.47%
3.31%
4.07%
-2.41%
2.29%
-3.67%
1.46%
2.60%
3.88%
2.96%
2.91%
3.95%
2.35%
3.33%
0.27%
4.19%
-0.35%
4.40%
0.85%

0.25%
0.24%
0.25%
0.26%
0.22%
0.25%
0.23%
0.25%
0.21%
0.27%
0.27%
0.32%
0.31%
0.28%
0.37%
0.37%
0.38%
0.37%
0.44%
0.42%
0.40%
0.46%
0.44%
0.54%
0.47%
0.45%
0.47%
0.43%
0.47%
0.42%
0.49%

0.08%
-0.71%
3.56%
-1.00%
1.81%
-1.19%
1.00%
3.10%
-2.91%
-4.62%
1.03%
1.31%
-2.78%
3.03%
3.70%
-2.78%
1.91%
-4.04%
1.02%
2.18%
3.48%
2.50%
2.47%
3.41%
1.88%
2.88%
-0.20%
3.76%
-0.82%
3.98%
0.36%

-5.0%
-15.9%
1.5%
9.8%
-2.9%
-0.1%
0.8%
5.6%
-3.1%
2.7%
9.2%
16.2%
-3.9%
-0.3%
12.9%
-3.4%
12.2%
-0.2%
-2.8%
-2.9%
6.1%
12.9%
14.9%
3.6%
6.7%
0.1%
2.2%
-2.2%
10.5%
-12.9%
0.7%

3. a. Estimate the for MSFT using the linear regression model

rMSFT rf = + (rM rf )
2
b. What is the adjusted R for the regressionmodel (that is what proportion of the variation in
rMSFT - rf is explained by variation in rM rf ) ?

Ans 3:
rMSFT rf = variable Y (dependent)
rM rf = variable X (independent)
Output regression excel:
SUMMARY OUTPUT

Regression Statistics
Multiple R

0.36770221

R Square
Adjusted R
Square

0.13520492

Standard Error

0.07760806

0.12029466

Observations

60

ANOVA
df

SS

MS

0.05461613

0.05461613

9.06791139

Residual

58

0.34933465

0.00602301

Total

59

0.40395078

Regression

Coefficients

Standard
Error

t Stat

P-value

Intercept

0.02115175

0.01056691

2.0016966

X Variable 1

1.05442172

0.3501553

3.01129729

Significance F
0.003848816

Lower 95.0%

Upper
95.0%

Lower 95%

Upper 95%

0.05000231

-2.20674E-07

0.04230372

-2.20674E-07

0.04230372

0.00384882

0.353509725

1.75533371

0.353509725

1.75533371

Graphic:

rmsft-rf
40.0%
y = 1.0544x + 0.0212
R = 0.1352

20.0%

-10.00%

-5.00%

0.0%
0.00%

rmsft-rf
Linear (rmsft-rf)

5.00%

10.00%

15.00%

-20.0%

a. rMSFT rf = + (rM rf )
y=1.0544 x + 0.0212
so, = 1.0544
b. Adjusted R2 = 0.12, it's mean that 12% variability of the model explained by the variation in rM- rf and
88% variation explained by another variable outside the model

You can use the CAPM to estimate Microsofts required return. You calculated Microsofts beta in
question 3. You will need the following additional information:

Short-term
Intermediate-term
Long-term

Riskless Rate at Year-End

1995
5.13%
5.50%
6.00%

Market Risk Premium

(rM-rf)
8.40%
7.40%
7.00%

4.Estimate MSFTs required return (re) using the CAPM and the short-term riskless rate.
Ans 4:
Based on question 3 = 1.0544
re
= rf + (rM-rf)
= 5.13% + 1.0544 ( 8.40%)
= 13.986%
5. Estimate re using the CAPM and the intermediate-term riskless rate.
Ans 5:
Based on question 3 = 1.0544
re
= rf + (rM-rf)
= 5.50% + 1.0544 ( 7.40%)
= 13.302%
6. Estimate re using the CAPM and the long-term riskless rate.
Ans 6:
Based on question 3 = 1.0544
re
= rf + (rM-rf)
= 6.00% + 1.0544 ( 7.00%)
= 13.380%
7. Compare your answers to questions 4,5, and 6. Can you explain why they differ?
Ans 7:
re is different because the period of time that are applied are not the same, whereas in the CAPM
is assumed throughout the investor plan of portfolio for a period that is identical.
8. Why is it important to be consistent in choosing the riskless rate and the market risk premium
when you use the CAPM?
Ans 8:
The selection of the riskless rate and the market risk premium consistently becomes important
because, it will achieve the same determinants for optimal portfolio of risky assets, the portfolio is
efficient at the limit obtained by pulling a tangent from the riskless rate towards the limit.