Understanding Dow Jones 30 Index And CAPM Return Is Essential For Essay.

Introduction to Dow Jones 30 Index

Questions:

1.Provide a Brief Discussion on the Chosen Index

2.Provide the latest and relevant Contribution of the Stock

3.Provide the aggressive and defensive securities within the Chosen Index

4.Discuss on Securities, which are Undervalued and Overvalued:

5.Recommend the Adequate Investment on the Financial Evaluation.

The overall Dow Jones 30 Index is mainly selected due to the high liquidity in the market. In addition, the index holds the maximum number of shares all around the world and represent the exact trend of the world. The index mainly comprises of significant stocks traded in NYSE and NASDAQ. The index is one of the oldest in world and effectively watched by maximum of the investors around the world. Dow Jones 30 Index mainly comprises of high yielding stocks, which are used by investors to identify the current trend of the market.

The overall stock selected in the assignment mainly depicts the CAPM return, Beta and Alpha, which could help in pinpointing the adequate stock for investment. The use of Security Market Line diagram could depict the adequate overvalued and undervalued stocks. Dionne, Li and Okou (2013) mentioned that SML line is an effective method to pin point viable investment opportunity, which could increase return from investment. However, Dzaja and Aljinovic (2013) argued that SML line is solely dependent on CAPM, which increase the risk of investment drastically for investors. The derivation is aggressive and defensive stock could only be detected by evaluating its alpha and beta, which is used by investors during their investment decision period.

Table 1: Depicting the Beta, Alpha and CAPM returns

(Source: As created by the author)

The above table mainly depicts the relevant aggressive and defensive stocks listed in Dow Jones 30 Index. Out of the 15 stock, whose beta is less than zero could be considered as the defensive stock, which are used by investors if stock market does not perform well or is in a down trend. There are three stocks namely Southern Missouri Bancorp, Greene County Bancorp, and Prudential Bancorp, which could be identified within the 15 stocks as the defensive investment opportunity. The rest of all the 12 stocks listed in the table 1 could be identified as the aggressive stock, which is used by investors to increase return from their investment. These aggressive stocks mainly have a positive beta, which increase the chance of loss for the investor. Dzaja and Aljinovic (2013) mentioned that investors mainly use the defence stocks as hedging instruments because it helps in reducing the losses incurred in aggressive stocks. However, Ha and Hoang (2017) argued that hedging strategies mainly loses its friction if the whole capital market is experiencing a recession.

The above table also depicts the alpha and beta of the stocks chosen from the Dow Index 30. The derivation beta and Alpha mainly allows the investor to understand them minimum risk, which is needed by them to maintain the position in the capital market. Habibi, Habibi and Habibi (2016) mentioned the beta derivation is an essential part of CAPM valuation, as higher beta will mainly increase the expected return generated from an investment.

Application of CAPM Return, Beta, and Alpha

Table 1, also depicts the overall return from investment on each of the 15 stocks, which could be used by investors to locate the adequate investment opportunity. The overall CAPM returns mainly depict the beta of each stock. According to the CAPM model higher beta measures high return, this is expected from a stock. Jagric et al. (2015) stated that non-fulfilments of the expected return could eventually instigate a large sell sphere, which could decline share price of the stock.

Figure 1: Depicting the Security Market Line comprising of 15 stocks

(Source: As depicted by the author)

The figure mainly depicts the relevant stock, which have the adequate return and could be efficiently be used as an investment option. CAPM return mainly provides all the relevant stocks, which could be used as the viable option by shareholders for generating return from investment. The overall SML line mainly depicts the over and undervalued stocks, which could provide retune from investment to the investor. There are no under over valued stocks, as the CAPM of all the stock is on the trend line of risk free rate. This only indicates that with higher beta returns could be changed from investment. Thus, it could be understood that there is no under or overvalued stocks present in the 15 stocks. Lipiec (2014) stated that the use of CAPM mainly allows investor to identify the most viable stock, which could provide adequate return from investment. On the other hand, Mazzola and Gerace (2015) criticises that SML derivations could mainly reduce its friction if adequate CAPM return are not derived from calculations.

Table 2: Depicting the stock for investment

(Source: As created by author)

The above table mainly depict the list of stock, which have the least beta and could provide higher return from investment. The returns are mainly within the market return and are comprised of low beta. Investment in the above-depicted stocks could eventually help the investors in generating a constant income from investment, as the risk of investment is relatively low (Nghiem 2015). Thus, the investors for generating a steady return from investment could conduct investment in the above stocks.

Reference

Dionne, G., Li, J. and Okou, C., 2013. An Extension of the Consuption-Based CAPM Model.

Dzaja, J. and Aljinovic, Z., 2013. Testing CAPM model on the emerging markets of the Central and Southeastern Europe. Croatian Operational Research Review, 4, p.164.

Džaja, J. and Aljinovi?, Z., 2013. Testing CAPM model on the emerging markets of the Central and Southeastern Europe. Croatian Operational Research Review, 4(1), pp.164-175.

Ha, N.M. and Hoang, N.D., 2017. Applying the CAPM Model in Identifying the Electricity Retail Price in Ho Chi Minh City, Vietnam. International Journal of Energy Economics and Policy, 7(2), pp.185-192.

Habibi, H., Habibi, R. and Habibi, H., 2016. Derivation of Kalman Filter Estimates Using Bayesian Theory: Application in Time Varying Beta CAPM Model. Journal of Statistical and Econometric Methods, 5(2), pp.1-16.

Jagric, T., Podobnik, B., Strasek, S. and Jagric, V., 2015. Risk-adjusted performance of mutual funds: some tests. South-eastern Europe journal of Economics, 5(2).

Lipiec, J., 2014. Capital Asset Pricing Model Testing at Warsaw Stock Exchange: Are Family Businesses the Remedy for Economic Recessions?. International Journal of Financial Studies, 2(3), pp.266-279.

Mazzola, P. and Gerace, D., 2015. A Comparison Between a Dynamic and Static Approach to Asset Management Using CAPM Models on the Australian Securities Market. Australasian Accounting Business & Finance Journal, 9(2), p.43.

Nghiem, L., 2015. Risk-return relationship: An empirical study of different statistical methods for estimating the Capital Asset Pricing Models (CAPM) and the Fama-French model for large cap stocks. arXiv preprint arXiv:1511.07101.

Sharifi, M., Ohadi, F. and Monjazeb, M.R., 2014. The Relationship between Stock Risk and Return Using the Consumption Based Capital Asset Pricing Model (C-CAPM) in the Food and Pharmaceutical Industries. Asian Journal of Research in Banking and Finance, 4(5), pp.90-103.