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CAPM estimation to make a prediction about the evolution of the Real Estate Returns

1.   Find the Market Index and Construct. Plot the Market Index

2.   Construct the Market Portfolio Return. Plot the Market Portfolio Return over Time.

3.   Characterize its behavior over time and the business cycle

4.   Find the Real Estate Market Index. Plot the Real Estate Market Index.

5.   Construct the Real Estate Return. Plot the Real Estate Return over time

6.   Characterize its behavior over time and the business cycle

7.   Find the Risk-Free Rate. Plot the Risk-Free Rate over Time.

8.   Characterize its behavior over time and the business cycle.

9.   Construct the Market Portfolio Excess Return. Plot the Market Excess Return.

10. Characterize its behavior over time and the business cycle.

11. Construct the Real Estate Excess. Plot the Market Portfolio Excess Return over.

12. Characterize its behavior over time and the business cycle

Part B. [40 points]

13. Plot the Market Portfolio Excess Return and Real Estate Excess Return on the same graph. Characterize their joint evolution over time.

14. Construct a CAPM model of the Real Estate Index. Write the Model and explain the meaning of variables. Perform regression analysis and estimate your CAPM model. Plot the regression line.

15. Using your CAPM estimation, characterize the behavior of Real Estate Excess Returns with respect to Market Returns.

16. Use your CAPM estimation to make a prediction about the evolution of the Real Estate Returns, according to the likely future Market Returns. Consider three hypothetical alternative scenarios for the future market returns. (You can make your own scenarios). What will be the expected future change of the Real Estate Returns?

 Good ScenarioMiddle ScenarioBad Scenario
Change in Total Market Returns+20%0%-20%
Probability of scenario0.250.250.5

17. Describe your data and data sources.

18. [10 bonus points] Consider a 3-Factor Model with factors: Excess Market Returns, Short-Term Risk Premium (TED) and Stock Market Volatility. Perform the regression analysis of the Real Estate Excess Returns on the 3 Factors. Present and analyze the estimated coefficients on factors. Describe your data and sources.

CAPM estimation to make a prediction about the evolution of the Real Estate Returns

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