GROUP TASK

1. Alfi Faridatus Saadah (1806160844)

2. Boi Hutagalung (1806249062)

PROBLEMS:
1. Calculate the monthly excess returns, rM-rf, on the market portfolio.
2. MSFT is not currently paying dividend. The closing price in December 1990 (adjusted for stock
splits) was $16.72. Calculate the monthly excess returns, rMSFT-rf, on Microsoft common stock.
3. a. Estimate the β for MSFT using the linear regression model rMSFT - rf = α + β(rM - rf)
b. What is the adjusted R2 for the regression model (that is, what proportion of the variation in rMSFT
- rf is explained by variation in rM - rf)?
You can use the CAPM to estimate Microsoft's required return. You calculated Microsoft's beta in
question 3. You will need the following additional information:
Riskless Rate at Market Risk Premium
Year-End 1995 (rM - rf)
Short-term 5,13 % 8,40 %
Intermediate-term 5,50 % 7,40 %
Long-term 6,00 % 7,00 %

4. Estimate MSFT's required return (re) using the CAPM and the short-term riskless rate.
5. Estimate re using the CAPM and the intermediate-term riskless rate.
6. Estimate re using the CAPM and the long-term riskless rate.
7. Compare your answers to questions 4, 5, and 6. Can you explain why they differ?
8. Why is it important to be consistent in choosing the riskless rate and the market risk premium
when you use the CAPM?
GROUP TASK
1. Alfi Faridatus Saadah (1806160844)
2. Boi Hutagalung (1806249062)

GROUP TASK
REAL WORLD APPLICATION
ESTIMATING MICROSOFT'S REQUIRED RETURN

Microsoft Corporation (stock symbol MSFT) is one of the leading providers of computer
software in the world. Its common stock is traded in the over-the-counter market and listed in
NASDAQ. The following table shown MSFT's monthly closing price during 1991-1995.

MSFT MSFT
Market T-Bill Market T-Bill
Month Closing Month Closing
Return Return Return Return
Price ($) Price ($)
Jan-91 21,81 4,42% 0,52% Jul-93 37,00 -0,47% 0,24%
Feb-91 23,06 7,16% 0,48% Agu-93 37,56 3,81% 0,25%
Mar-91 23,58 2,38% 0,44% Sep-93 41,25 -0,74% 0,26%
Apr-91 22,00 0,28% 0,53% Okt-93 40,06 2,03% 0,22%
Mei-91 24,39 4,28% 0,47% Nov-93 40,00 -0,94% 0,25%
Jun-91 22,71 4,57% 0,42% Des-93 40,31 1,23% 0,23%
Jul-91 24,50 4,68% 0,49% Jan-94 42,56 3,35% 0,25%
Agu-91 28,42 2,35% 0,46% Feb-94 41,25 -2,70% 0,21%
Sep-91 29,67 -1,64% 0,46% Mar-94 42,35 -4,35% 0,27%
Okt-91 31,29 1,34% 0,42% Apr-94 46,25 1,30% 0,27%
Nov-91 32,42 -4,04% 0,39% Mei-94 53,75 1,63% 0,32%
Des-91 37,08 11,43% 0,38% Jun-94 51,63 -2,47% 0,31%
Jan-92 40,00 -1,86% 0,34% Jul-94 51,50 3,31% 0,28%
Feb-92 41,17 1,28% 0,28% Agu-94 58,13 4,07% 0,37%
Mar-92 39,50 -1,96% 0,34% Sep-94 56,13 -2,41% 0,37%
Apr-92 36,75 2,91% 0,32% Okt-94 63,00 2,29% 0,38%
Mei-92 40,33 0,54% 0,28% Nov-94 62,88 -3,67% 0,37%
Jun-92 35,00 -1,45% 0,32% Des-94 61,13 1,46% 0,44%
Jul-92 36,00 4,03% 0,31% Jan-95 59,38 2,60% 0,42%
Agu-92 37,13 -2,02% 0,26% Feb-95 63,00 3,88% 0,40%
Sep-92 40,25 1,15% 0,26% Mar-95 71,13 2,96% 0,46%
Okt-92 44,38 0,36% 0,23% Apr-95 81,75 2,91% 0,44%
Nov-92 46,56 3,37% 0,23% Mei-95 84,69 3,95% 0,54%
Des-92 42,69 1,31% 0,28% Jun-95 90,38 2,35% 0,47%
Jan-93 43,25 0,73% 0,23% Jul-95 90,50 3,33% 0,45%
Feb-93 41,69 1,35% 0,22% Agu-95 92,50 0,27% 0,47%
Mar-93 46,25 2,15% 0,25% Sep-95 90,50 0,43% 4,19%
Apr-93 42,75 -2,45% 0,24% Okt-95 -0,35% 0,47%
100,00
Mei-93 46,31 2,70% 0,22% Nov-95 87,13 4,40% 0,42%
Jun-93 44,00 0,33% 0,25% Des-95 87,75 1,85% 0,49%
GROUP TASK
1. Alfi Faridatus Saadah (1806160844)
2. Boi Hutagalung (1806249062)

SOLUTIONS:
1 & 2. Monthly excess returns (rM-rf) and monthly excess returns (rMSFT-rf), on Microsoft common stock
are as follows:
Month MSFT MSFT Market T-Bill Market Excess MSFT Excess
Closing Price Return Return Return Returns Return
($) (rMSFT) (rM) (rf) (rM-rf) (rMSFT-rf)
Des-90 16,72
Jan-91 21,81 30,44% 4,42% 0,52% 3,90% 29,92%
Feb-91 23,06 5,73% 7,16% 0,48% 6,68% 5,25%
Mar-91 23,58 2,25% 2,38% 0,44% 1,94% 1,81%
Apr-91 22,00 -6,70% 0,28% 0,53% -0,25% -7,23%
Mei-91 24,39 10,86% 4,28% 0,47% 3,81% 10,39%
Jun-91 22,71 -6,89% 4,57% 0,42% 4,15% -7,31%
Jul-91 24,50 7,88% 4,68% 0,49% 4,19% 7,39%
Agu-91 28,42 16,00% 2,35% 0,46% 1,89% 15,54%
Sep-91 29,67 4,40% -1,64% 0,46% -2,10% 3,94%
Okt-91 31,29 5,46% 1,34% 0,42% 0,92% 5,04%
Nov-91 32,42 3,61% -4,04% 0,39% -4,43% 3,22%
Des-91 37,08 14,37% 11,43% 0,38% 11,05% 13,99%
Jan-92 40,00 7,87% -1,86% 0,34% -2,20% 7,53%
Feb-92 41,17 2,93% 1,28% 0,28% 1,00% 2,65%
Mar-92 39,50 -4,06% -1,96% 0,34% -2,30% -4,40%
Apr-92 36,75 -6,96% 2,91% 0,32% 2,59% -7,28%
Mei-92 40,33 9,74% 0,54% 0,28% 0,26% 9,46%
Jun-92 35,00 -13,22% -1,45% 0,32% -1,77% -13,54%
Jul-92 36,00 2,86% 4,03% 0,31% 3,72% 2,55%
Agu-92 37,13 3,14% -2,02% 0,26% -2,28% 2,88%
Sep-92 40,25 8,40% 1,15% 0,26% 0,89% 8,14%
Okt-92 44,38 10,26% 0,36% 0,23% 0,13% 10,03%
Nov-92 46,56 4,91% 3,37% 0,23% 3,14% 4,68%
Des-92 42,69 -8,31% 1,31% 0,28% 1,03% -8,59%
Jan-93 43,25 1,31% 0,73% 0,23% 0,50% 1,08%
Feb-93 41,69 -3,61% 1,35% 0,22% 1,13% -3,83%
Mar-93 46,25 10,94% 2,15% 0,25% 1,90% 10,69%
Apr-93 42,75 -7,57% -2,45% 0,24% -2,69% -7,81%
Mei-93 46,31 8,33% 2,70% 0,22% 2,48% 8,11%
Jun-93 44,00 -4,99% 0,33% 0,25% 0,08% -5,24%
Jul-93 37,00 -15,91% -0,47% 0,24% -0,71% -16,15%
Agu-93 37,56 1,51% 3,81% 0,25% 3,56% 1,26%
Sep-93 41,25 9,82% -0,74% 0,26% -1,00% 9,56%
Okt-93 40,06 -2,88% 2,03% 0,22% 1,81% -3,10%
Nov-93 40,00 -0,15% -0,94% 0,25% -1,19% -0,40%
Des-93 40,31 0,78% 1,23% 0,23% 1,00% 0,55%
Jan-94 42,56 5,58% 3,35% 0,25% 3,10% 5,33%
Feb-94 41,25 -3,08% -2,70% 0,21% -2,91% -3,29%
Mar-94 42,35 2,67% -4,35% 0,27% -4,62% 2,40%
Apr-94 46,25 9,21% 1,30% 0,27% 1,03% 8,94%
Mei-94 53,75 16,22% 1,63% 0,32% 1,31% 15,90%
Jun-94 51,63 -3,94% -2,47% 0,31% -2,78% -4,25%
Jul-94 51,50 -0,25% 3,31% 0,28% 3,03% -0,53%
Agu-94 58,13 12,87% 4,07% 0,37% 3,70% 12,50%
Sep-94 56,13 -3,44% -2,41% 0,37% -2,78% -3,81%
Okt-94 63,00 12,24% 2,29% 0,38% 1,91% 11,86%
Nov-94 62,88 -0,19% -3,67% 0,37% -4,04% -0,56%
Des-94 61,13 -2,78% 1,46% 0,44% 1,02% -3,22%
Jan-95 59,38 -2,86% 2,60% 0,42% 2,18% -3,28%
Feb-95 63,00 6,10% 3,88% 0,40% 3,48% 5,70%
Mar-95 71,13 12,90% 2,96% 0,46% 2,50% 12,44%
Apr-95 81,75 14,93% 2,91% 0,44% 2,47% 14,49%
Mei-95 84,69 3,60% 3,95% 0,54% 3,41% 3,06%
Jun-95 90,38 6,72% 2,35% 0,47% 1,88% 6,25%
Jul-95 90,50 0,13% 3,33% 0,45% 2,88% -0,32%
Agu-95 92,50 2,21% 0,27% 0,47% -0,20% 1,74%
Sep-95 90,50 -2,16% 0,43% 4,19% -3,76% -6,35%
Okt-95 100,00 10,50% -0,35% 0,47% -0,82% 10,03%
Nov-95 87,13 -12,87% 4,40% 0,42% 3,98% -13,29%
Des-95 87,75 0,71% 1,85% 0,49% 1,36% 0,22%
GROUP TASK
1. Alfi Faridatus Saadah (1806160844)
2. Boi Hutagalung (1806249062)

3. Using Excel we can make rMSFT - rf = α + β(rM - rf), linear regression model
SUMMARY OUTPUT

Regression Statistics
Multiple R 0,341610582
R Square 0,116697790
Adjusted R Square 0,101468441
Standard Error 0,078744082
Observations 60

ANOVA
df SS MS F Significance F
Regression 1 0,047513515 0,047513515 7,662690885 0,0075553
Residual 58 0,359636568 0,00620063
Total 59 0,407150082

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95,0% Upper 95,0%
Intercept 0,017151061 0,010785499 1,590196358 0,1172271 -0,004438461 0,038740583 -0,004438461 0,038740583
Risk Premium 0,994773262 0,359363075 2,768156586 0,0075553 0,275429912 1,714116612 0,275429912 1,714116612

a. Using summary output above, we know βMSFT is 0,994773262 and it’s a significant value (P-
value <0,01)
b. Using summary output above, we know R2 is 11,6697790% or only 11,6697790% of the
variation of rMSFT - rf can be explained by variation in rM - rf

4. MSFT's required return or MSFT (re) using the CAPM and the short-term riskless rate
re = rf (short-term) + βMSFT (rM-rf) short-term
re = 0,0513 + (0,994773262 x 0,084)
re = 0,134860954 = 13,49%

5. MSFT's required return or MSFT (re) using the CAPM and the Intermediate-term riskless rate
re = rf (intermediate-term) + βMSFT (rM-rf) intermediate-term
re = 0,055 + (0,994773262 x 0,074)
re = 0,128613221 = 12,86%

6. MSFT's required return or MSFT (re) using the CAPM and the long-term riskless rate
re = rf (long-term) + βMSFT (rM-rf) long-term
re = 0,06 + (0,994773262 x 0,07)
re = 0,129634128 = 12,96%

7. The different of the MSFT’s required return is because differentiation in rate of the riskless return
and market premiums of short, intermediate and long term. No.4 give the smallest riskless return
but give the highest market premium, so given βMSFT (0,994773262) No. 4 give the highest required
rate of return of 13,49%, while No.6 get the second highest with 12,96% and No.5 is the smallest
return of 12,86%.

8. It’s crusial that we have a consistency in choosing riskless return and market risk premium in order
to get the required return we desire. Because as shown in no.4, 5 and 6 calculation the MSFT’s re
is differ according the view of the investment term.