Valuation Analysis

2011 Spring Midterm Solutions

1- a) Explanatory variable: interest rate

        Response variable: returns of IMKB

b) r = Cov(x,y)/(stdev(x)*stdev(y)) = -0,0363/(1,599*0,078) = -0,0363/0,1263 = -0,028

c)  There is a negative relationship meanig that when interest rate rises the return of IMKB falls. But the magnitude of the negative relationship is not strong since -0,028 is so close to zero.

d)  Beta 1 = Cov(x,y)/Var(x) = -0,0363/0,0063 = -5,76

This means when interest rate indreases by 1% the return of the stock market decreases by 5,76%.

e) Beta 0 = Cov(x,y)/Var(y) = -0,0363/2,5591 = -0,014

This means when interest rates are zero (no interest rate), the return on IMKB is -0,014.

2- a) We have 100 observations, since alpha=10% we will count 10 observations (100/10 =10) from the negative daily returns that is observed for ABC stock. Each interval has 4 subinterval and each of which is equal to 0,25. So, 0,25/6*5 = 0,208

-2 +2*0,25 + 0,208 = -1,292%

With normality assumption (a-0,073177) / 1,006080 =-1,645

a = (-1,645)*1,006080 + 0,073177 = -1,5818 %

They are not equal because the daily retruns of stock ABC is not exactly normally distributed as it has a skewness of 0,195143 and kurtosis of  2,870.

b)  Alpha = 5%, we will count 5 observatio0ns from the left hand side of the histogram so the VAR with 95% confidence interval is -1,5%

If normality is assumed;

(a-0,073177) / 1,006080 = -1,96

a = (-1,96)*1,006080 + 0,073177 = -1,8987 %

Since the distribution of daliy returns is not normal the value calculated by two methods are different from each other.