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Old 11-15-2010, 07:23 AM
Turloughmack Turloughmack is offline
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Join Date: Nov 2010
Location: Donegla + Ireland
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Default application of the CAPM

Hi my exercise is regarding the capm and plotting the security market line.
I have been given the return for 7 stocks from the years 1998 - 2009 inclusive.
I have been told that the 7 stocks make up the market.
I have to calculate the average return for each stock which I have done.
The next part of the question asks us to calculate all the Beta's for the 7 stocks using the historical data. Here Beta = Cov(R(i), R(m))/ Var(R(m)).
I understand that the covariance is the relation between the return on stock i and the return on the market. The problem is I am not sure where my data lies for the market. I was told the 7 seven stocks make up the market but how do I use this to calculate my market return?
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Old 01-20-2011, 05:54 PM
brew brew is offline
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Default Re: application of the CAPM

try to average the stock returns of those 7 stocks to make a market.

average of where they started

average of where they ended
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