Suppose we are given the Euphrates Company’s security, S that is trading on a stock market M whose prices and dividends at the start and end of the months of July to October of a given year are as tabulated below:
Using the financial data given above:
a) Estimate the simple linear regression equation connecting the market, M and the security, S returns using the CAPM;
b) Determine the simple linear regression equation connecting market and security returns using the simple Index Model approach;
c) Estimate the variance of the error terms, the variance of the market and total variance facing security S using the excess returns;
d) Evaluate the covariance and correlation coefficient of the security, S and the market, M based on excess returns and appraise it;
e) Calculate the coefficient of determination connecting the market, M to the security, S returns and interpret it.