The purpose of this paper is to do empirical research on the capital asset pricing model. The bases of our research are the returns of three stocks, the S&P 500 index which represents the market and the LIBOR as a proxy for the risk-free interest rate. The three companies that were chosen in this paper were Kellogg Company, KB Financial Group Inc. and Kate Spade & Company and all of them in combination represent our fictive market.
Table of Contents
1. Introduction
2.a Basic figures of the firms
2.b Statistical moments of stock market returns
2.c The minimum variance portfolio
2.d The tangential portfolio
3. Turn-of-the-month anomaly
Objectives and Topics
The primary objective of this paper is to conduct an empirical analysis of the Capital Asset Pricing Model (CAPM) using a portfolio of three specific stocks—Kellogg Company, KB Financial Group Inc., and Kate Spade & Company—in conjunction with the S&P 500 index as a market proxy and LIBOR as the risk-free interest rate. Additionally, the study investigates the existence of the "turn-of-the-month" anomaly in stock returns.
- Empirical application of CAPM using three distinct stock assets.
- Portfolio construction focusing on the Minimum Variance Portfolio (MVP) and the Tangential Portfolio.
- Analysis of systematic and unsystematic risk within various portfolio combinations.
- Investigation of market seasonalities, specifically the "turn-of-the-month" effect and the "January effect".
Excerpt from the Book
2.c The minimum variance portfolio
The minimum variance portfolio (MVP) is a certain portfolio, which either can consist of any possible combination of all available stocks (in this case three stocks) or which can as well consist of just one single stock. Using all conceivable combinations/portfolios of stocks, the MVP is the portfolio which has the lowest standard deviation. Therefore the MVP is the portfolio which offers the lowest achievable risk to the investor out of all possible stock combinations.
Creating a plot including all these combinations on a graph depicting the return of the portfolio on the ordinate and its standard deviation on the abscissa, the MVP will be the most left one of all points on this graph. Although it seems to be intuitive, it is necessary to mention that the MVP has not the highest return of all portfolios. The portfolio which offers the highest possible return to its investors is called the maximum return portfolio and is located at the highest point on the graph mentioned before. These two considerations lead us to a conclusion which is as simple as intuitive: There must be a trade-off between the expected return and the riskiness of a portfolio. To visualize this fact, there are eight hundred simulated random portfolios consisting of this paper’s three stocks enhanced to the excel sheet as well as the MVP out of these portfolios.
Chapter Summaries
1. Introduction: Outlines the purpose of the empirical research and introduces the selected companies and proxies for the risk-free rate.
2.a Basic figures of the firms: Provides a descriptive overview of the companies using key statistics such as market capitalization, book value, P/E ratio, and dividend yield.
2.b Statistical moments of stock market returns: Analyzes the mean returns, variances, and standard deviations of the stocks to establish dependencies and volatility measurements.
2.c The minimum variance portfolio: Defines and calculates the portfolio with the lowest standard deviation to demonstrate the risk-return trade-off.
2.d The tangential portfolio: Explains the construction of the tangential portfolio by incorporating lending and borrowing at the risk-free interest rate to optimize returns.
3. Turn-of-the-month anomaly: Investigates the seasonal performance of stocks to determine if the majority of monthly returns occur during the first few days of the month.
Keywords
Capital Asset Pricing Model, CAPM, Minimum Variance Portfolio, MVP, Tangential Portfolio, S&P 500, LIBOR, systematic risk, unsystematic risk, turn-of-the-month anomaly, January effect, stock market returns, portfolio diversification, market efficiency, financial statistics.
Frequently Asked Questions
What is the core focus of this research paper?
The paper focuses on the empirical application of the Capital Asset Pricing Model (CAPM) using a fictive market composed of three selected stocks and evaluates portfolio performance alongside market seasonalities.
What are the primary thematic fields covered?
The study covers financial portfolio theory, including variance analysis, risk assessment, the calculation of the Capital Market Line, and market anomaly testing.
What is the main research question or goal?
The goal is to analyze how different portfolio constructions—specifically the MVP and the tangential portfolio—affect risk and return, while also verifying the "turn-of-the-month" return anomaly.
Which scientific methods are utilized?
The authors use empirical quantitative analysis, calculating statistical moments of returns, betas, correlations, and the Sharpe ratio based on historical market data.
What is addressed in the main body of the paper?
The main body treats the basic firm characteristics, statistical analysis of returns, the derivation of efficient portfolios, and the longitudinal study of return anomalies.
Which keywords best characterize this work?
Key terms include CAPM, portfolio optimization, systematic/unsystematic risk, market anomalies, and the turn-of-the-month effect.
How is the "turn-of-the-month" anomaly defined in the context of this study?
It is defined as the empirical observation where a majority of monthly stock returns are realized in the first few work days of the month compared to the rest of the month.
What does the comparison between the 50:50-portfolio and the MVP reveal?
The comparison shows that the 50:50-portfolio achieves a lower standard deviation and a higher expected return than the MVP, providing a better risk-return profile for the investor.
Why did the authors choose LIBOR over EURIBOR?
The choice was driven by the fact that the selected stocks are traded on the New York Stock Exchange (NYSE), making American interest rates a more appropriate proxy for the risk-free rate.
- Quote paper
- Alexander Moßhammer (Author), Elias Danzl (Author), Kilian Altenberger (Author), 2015, Capital Asset Pricing Model (CAPM). A Case Study, Munich, GRIN Verlag, https://www.grin.com/document/288267
