Using the Estimated CAPM Model

Suppose we are security analysts working with a large pension fund. Our line manager needs to make decisions on adjusting the composition of the growth portfolio. We are expected to provide recommendations on which NZ companies are undervalued or overvalued from 15/03/2021 to 19/03/2021 based on CAPM.

Please follow the instructions below.

Data Collection: 1) Randomly select five NZ listed companies from different industries (two if you work independently). 2) Collect daily stock prices for your selected companies from 20/03/2020 to 19/03/2021 via Collect daily stock market index for the same period. You need to determine the appropriate stock market index.

Tasks: 1) Calculate the average return and risk for the index and each company based on historical information from above.

2) Estimate the CAPM model for each stock using data from 20/03/2020 to 19/02/2021. Are betas you estimated for different stocks reasonable?

3) Using the estimated CAPM model to calculate the average alpha value for each stock from 15/03/2021 to 19/03/2021.

4) Which of your selected companies are undervalued or overvalued? Why?