1) Because we have time series data we have to create a time variable before we can continue with the assignment. Create a weekly time variable.
Weekly time variable
2) Create indices of the four firms stocks and an index of the OMX 30 index. The base point is the first observation, that is, the first value of each index should be 100. How have the four stocksand the OMX 30 index evolves over time?
Comment the graph.
The four stocks and OMX 30 INDEX have evolved…
We can appreciate that the four companies begin with 100 index in 2004, then for 2006 all of them have been increasing , but the one that is been less increased is ericsson. Since 2006, ericsson has been decreased more or less until the 50 index , while the others companies wheregrowing up their indexes . The indexes of all the companies and the stock index are growing up until 2007, and the farthest enterprise from the omx 30 is ericsson . The problem is that at 2007 began the crisis of the mortgages subprime in the U.S.A, and then it was expanded to all Europe and , consequently the stock index and the others enterprises indexes were decreased until 2009. At 2009 theindexes and also the omx 30 experimented an increase due to the economic recuperation.
3) Plot the risk-free return (r)over time. Has the risk-free return been stable during the period?
The risk-free return hasn´t been stable during the 2004 and 2005, because at 2006 began the mortgage subprime in the EE.UU and this expanded the risk-free to all Europe, as we can see in the figure. The risk-free experimented a high increasing and has been growing up since 2006 and until 2009. The reason for this expectacular increasing is because the one of the causes of the crisis was that the invertors , intencionally or not, made an incorrect valoration of the risks. Also the risks of the subprime mortgages was transferred to bond and the securitisation, and hence to pension funds andinvestment. In fact, the entities of risk assessment (as the Standard & Poors (S&P or Moody´s) began after the crisis to be investigated by its potential liability, and only when the crisis was unleashed, the rating agencies of risk tightened the valuation criteria. Also, the legislators Americans and Europeans began to shuffling a hardening of the criteria for granting mortgages. And from 2009the risk has been incredible decreased, almost ( in the period from 2009 to 2010) been 0. Now it manteins stable.
4) Choose one company (for the rest of the questions) and explain why you choose this particularly company.
The company that we have chosen is Ericsson, because it is one of the largest companies of telecommunications and data communication systems in Sweden. This company isalso very commited in sustainability and is worried about the environmental impact, which is a very important subject nowadays, and which demonstrates that the company is one of the leaders in that section of the market.
5) Construct the risk premium measure for the company of your choice and the overall market risk premium. Plot these two risk premiums over time and describe what you see.After having created the two risk premiums over time, we can see that ericsson stock present negative fluctuations in the period of 2004 and a quarter of 2005, then is starting to have positive fluctuations mixed with negatives ones until 2007 when registers the worst data having a negative fluctuation that goes almost to -40. From the period of 2007 until 2009 abound negative fluctuations,although there are some positives. From the period of 2009 to 2010 ericsson stock follows the market. And in 2010 we can apreciatte some positive fluctuations. The risk premium is on for a financial institution charged for a loan due to the statistical risk of default that this represents.
6) Estimate the CAPM model in equation (3) for the chosen company. Interpret
R2 and β2. Is the slope...