Final Report Fin 637

North South University
School of Business & Economics

MBA Program
Investment Theory (FIN 637)
Fall 2022, Section-1
Group Project Report

On
Risk-return Properties of Some US

Asset Classes
Submitted to
Arifur Rahman, PhD
Associate Professor of Finance
School of Business & Economics
North South University
Prepared By
Name ID
MD. Mohtasim Neaz 2016639660
AKILA JAHAN 2115019690
MUDABBIR UDDIN AHMED 2215106660
GAKIYA SULTANA 2115122690
SAIDUL HASAN NAYEM 2115152690
Submission Date: 24th December 2022

Table of Contents
1. Raw Data with Analysis ....................................................................................................... 3
1.1. Rate of Return ............................................................................................................. 3
1.2. Risk/Standard Deviation .............................................................................................. 4
1.3. Risk Premium ............................................................................................................... 4
1.4. Sharpe Ratio ................................................................................................................ 5
1.5. Skewness ..................................................................................................................... 6
1.6. Kurtosis ........................................................................................................................ 6
2. Covariance matrices ............................................................................................................ 7
3. Regression Analysis ............................................................................................................. 8
3.1. US Large Cap & US Stock Market..................................................................................... 8
3.2. US Mid Cap & US Stock Market ..................................................................................... 11
3.3. US Small Cap & US Stock Market ................................................................................... 14
3.4. US Micro Cap & US Stock Market .................................................................................. 17
3.5. ALL Stock & US Stock Market ........................................................................................ 20
3.6. US-Large-Cap, US-Mid-Cap, US-Small Cap, and US-Stock-Market. ................................ 21
4. Calculation Summery ........................................................................................................ 23
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1. Raw Data with Analysis
This section compares nominal data with real data of the different US stock categories.
For reference, U.S. Large Cap refers to the top 85% of investable market
capitalization, Mid U.S. Cap refers to the top 70%-85% of the investable market
capitalization, U.S. Small Cap means the U.S. companies falling between the bottom
2% to 15% of the investable market and lastly, U.S. Micro Cap are those companies
comprising of the bottom 2% of the investable market capitalization.
To understand and compare company stocks within the market, real data and nominal
data is used and assessed by calculating:
• Rate of Return.
• Risk/Standard Deviation.
• Risk Premium.
• Sharpe Ratio.
• Skewness.
• Kurtosis.
1.1. Rate of Return
A real rate of return is adjusted for inflation, showing purchasing power and indicates
how much is actually earned. Nominal rate of return is not adjusted for inflation,
showing current situation of the market.
Rate of Return US Stock Market US Large Cap US Mid Cap US Small Cap US Micro Cap Long-Term Corporate Bonds Gold
Nominal Rate of return 11.79% 11.74% 13.32% 13.38% 14.82% 7.82% 9.95%
Real Rate of Return 7.62% 7.58% 9.08% 9.10% 10.49% 3.91% 5.49%
Fig 1.1(a): Table showing real rate of return vs nominal rate of return.
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Fig 1.1(b): Graph showing real rate of return vs nominal rate of return.
As seen from the graph, the real rate of return on the market is 7.62%. The U.S. Large
Cap market shows the lowest real rate of return which is 7.58%, the nominal rate of
return is also the lowest. The highest real rate of return and the highest nominal rate
of return belongs to U.S. Micro Cap. The rates of return be it real or nominal for U.S.
Mid Cap and U.S. Small Cap are relatively equal to each other but are greater than
that of U.S. Large Cap and U.S. Stock Market. It seems that Mid Cap, Small Cap and
Micro Cap offer greater return percentages than that of the market, so they can be
invested in.
1.2. Risk/Standard Deviation
SD US Stock Market US Large Cap US Mid Cap US Small Cap US Micro Cap Long-Term Corporate Bonds Gold
Nominal SD 17.54% 17.37% 18.56% 20.58% 24.35% 9.88% 26.78%

Real SD 17.32% 17.25% 18.17% 19.84% 23.42% 10.59% 23.58%
Fig 1.2(a): Table for Risk/Standard deviation for different U.S. Asset Classes.
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Fig 1.2(b): Graph for Risk/Standard deviation for different U.S. Asset Classes.
The risk of an investment is found via the standard deviation which is the square root
of variance. As seen previously, the U.S. Large Cap offered the lowest rates of return-
and here it is noticed that its standard deviation, be it real or nominal, is the lowest in
percentage. It was observed that U.S. Micro Cap had the highest nominal and real
return, and here it is shown that by calculation, the standard deviation is the highest
as well. The stocks with higher rates of return will have greater risk, and by calculation
the theory is consistent.
1.3. Risk Premium
Risk Premium US Stock Market US Large Cap US Mid Cap US Small Cap US Micro Cap Long-Term Corporate Bonds Gold
Nominal Risk Premium 4.90% 4.85% 6.44% 6.50% 7.94% 0.93% 3.07%
Real Risk Premium 4.70% 4.70% 4.67% 6.16% 6.19% 0.99% 2.58%
Fig 1.3. (a): Table for Risk premium for different U.S. Asset Classes.
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Fig 1.3. (b): Graph for Risk premium for different U.S. Asset Classes.
In general, the risk premium for all stocks, and the market is positive. The lowest risk
premium is if one invests in Long Term Corporate Bonds. The risk premium for U.S.
Stock Market and Large Cap is relatively equal but lower than Mid Cap and Small Cap.
The risk premium for U.S. Microcap is greater, proving the highest rate of return one
can get in spite of risk while investing here than investing in risk free assets.
1.4. Sharp Ratio
Sharp ratio US Stock Market US Large Cap US Mid Cap US Small Cap US Micro Cap Long-Term Corporate Bonds Gold
Nominal Sharp ratio 27.95% 27.93% 34.68% 31.55% 32.61% 9.43% 11.45%
Real Sharp ratio 27.15% 27.04% 33.92% 31.18% 32.34% 9.36% 10.94%
Fig 1.4. (a): Table for Sharp ratio for different U.S. Asset Classes.
Figure 1.4. (a): Graph for Sharpe Ratio Comparison
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The higher a stock/portfolio’s Sharpe ratio, the greater its performance, in adjustment
to risk. The Long-Term Corporate Bonds has a Sharpe ratio of 0.09 which does not
resonate with the standard broader market. All other companies have a Sharpe ratio
which is in the range of 0.27-0.34. That being said, the stock with the best performance
based on calculation of the highest Sharpe ratio is U.S. mid Cap.
1.5. Skewness
Skew US Stock Market US Large Cap US Mid Cap US Small Cap US Micro Cap Long-Term Corporate Bonds Gold
Nominal Skew -0.76 -0.74 -0.71 -0.39 0.07 -0.99 1.90

Real Skew -0.79 -0.75 -0.79 -0.52 0.006 -0.90 1.38
Fig 1.5. (a): Skewness of different U.S. Asset Classes.
The skewness of the different companies has values that range from -0.5 to -1. This
implies that the data is negatively skewed. This means that the calculated standard
deviation for each company is underestimating the risk of investing in any of these
assets. When nominal skew is considered, only the U.S. Micro Cap and Gold
skewness is positive, meaning risk is overestimated.
1.6. Kurtosis
Kurtosis US Stock Market US Large Cap US Mid Cap US Small Cap US Micro Cap Long-Term Corporate Bonds Gold
Nominal Kurtosis 0.05 0.09 0.54 -0.12 0.47 3.51 6.27

Real Kurtosis 0.04 0.01 0.50 0.01 0.75 2.40 4.08
Fig 1.6. (a): Kurtosis of different U.S. Asset Classes.
Kurtosis is also used to calculate financial risk. A higher value of kurtosis implies a
high probability of extremely high/small returns associated with a high risk. A lower
value of kurtosis implies an average amount of risk since there is low probability for
extreme returns. Here, Long-Term Corporate Bonds and Gold show extreme volatility
whereas the remaining markets indicate moderate risk for investment.
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2. Covariance matrices
Covariance matrices stand for representing covariance values of each pair of

variables in multivariate data. Also, the covariance between the same variables
equals variance, so, the diagonal shows the variance of each variable. Values in
the covariance matrix show the distribution magnitude and direction of multivariate
data in multidimensional space.
COVARIANCE MATRIX
ON
Nominal Rate of Return
Long
US_Large_ US_Small_Ca US_Micro Term
US_Mid_Cap Gold
Cap p _Cap Cor
Bonds
US_Large_Cap 0.03079 0.02980 0.03088 0.03081 0.00677 -0.00910
US_Mid_Cap 0.02980 0.03515 0.03713 0.03927 0.00785 -0.00807
US_Small_Cap 0.03088 0.03713 0.04322 0.04774 0.00686 -0.00674
US_Micro_Cap 0.03081 0.03927 0.04774 0.06048 0.00621 0.07314
Long Term Corp

0.00677 0.00785 0.00686 0.00621 0.00997 -0.00135
Bonds
Gold -0.00910 -0.00807 -0.00674 -0.00645 -0.00135 0.07314
Here, the covariance matrix has been calculated using nominal return data. All the
data in this matrix indicate each stocks contribution on total portfolio variance. US-
Micro-Cap and Gold has higher contribution than US-Large-Cap, US-Mid-Cap and US-
Small-Cap.
COVARIANCE MATRIX
ON
Real Rate of Return
US_Large_Cap_R US_Mid_Cap_Re US_Small_Cap_R Long Term Cor

US_Micro_Cap_Real Gold
eal al eal Bonds
US_Large_Cap_Real 0.03037 0.02908 0.02968 0.02947 0.00812 -0.00936

US_Mid_Cap_Real 0.02908 0.03367 0.03503 0.03688 0.00878 -0.00892
US_Small_Cap_Real 0.02968 0.03503 0.04016 0.04419 0.00748 -0.00825
US_Micro_Cap_Real 0.02947 0.03688 0.04419 0.05594 0.00678 -0.00827
Long Term Corp Bonds 0.00812 0.00878 0.00748 0.00678 0.01144 -0.00177
Gold -0.00954 -0.00910 -0.00842 -0.00843 -0.00177 0.05562
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When variance has been calculated on real return data, we can see the small reduction
in each stock’s variances. Again US-Micro-Cap and Gold have the highest covariance
value here.
3. Regression Analysis
3.1. US Large Cap & US Stock Market
3.1.1. Regression Analysis on Nominal Rate of Return
US Large Cap & US Stock Market
Regression Statistics Beta 0.983

Multiple R 0.992251794 Market Variance 3.14%
R Square 0.984563623 Systemic Variance beta^2*var_m 0.0303
Adjusted R Square 0.984248595 Firm Specific Variance var_e 0.0005
Standard Error 0.022021872 Total Variance Total Variance 0.0308
Observations 51
R Square 0.984
ANOVA
df SS MS F Significance F
Regression 1 1.515664151 1.51566415 3125.320034 4.7559E-46
Residual 49 0.02376318 0.00048496
Total 50 1.539427332
US Large Cap Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 0.0015254 0.003715307 0.41057175 0.683176465 -0.005940789 0.008991589 -0.005940789 0.008991589
US Stock Market 0.982817605 0.017580276 55.9045618 4.7559E-46 0.947488718 1.018146491 0.947488718 1.018146491
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3.1.2. Regression Analysis on Real Rate of Return
US Large Cap & US Stock Market

Beta 0.9891
Regression Statistics Market Variance 3.06%
Multiple R 0.992812435 Systemic Variance beta^2*var_m 0.0299
R Square 0.985676532 Firm Specific Variance var_e 0.0004
Adjusted R Square 0.985384216 Total Variance Total Variance 0.0304
Standard Error 0.021067023
Observations 51 R Square 0.985
ANOVA
Regression 1 1.496541086 1.4965411 3371.959176 7.60004E-47
Residual 49 0.021747153 0.0004438
Total 50 1.51828824
US Large Cap Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 0.0004698 0.00322261 0.1457823 0.884691287 -0.006006278 0.006945877 -0.006006278 0.006945877
US Stock Market 0.989097862 0.017033273 58.068573 7.60004E-47 0.954868219 1.023327506 0.954868219 1.023327506
For better interpretation of our analysis, we have taken linear regression analysis of US
large Cap and US Market Cap, taking in consideration nominal and real interest rate
separately.
• Multiple R
This represents the multiple correlation between the dependent variable (US Large
Cap) and independent variable (US market Cap). Multiple R for regression analysis
Page | 10
of both nominal and real interest is approximately 0.992 representing inflation has
no effect on the correlation between US Large cap and US market cap.
• R Square
Also known as co-efficient of determination, R Square tells how well the
regression line approximates the real data. In case of nominal regression,
the R Square stands at 98.46% whereas for real regression it stands at
98.57%, suggesting inflation adjusted regression approximates the real
data more.
• Adjusted R Square
It represents the R Square value, adjusted for the number of predictor
variables in the model. Similar to R Square analysis, for nominal
regression then it stands at 98.42% and for real regression it is 98.54%
showing inflation adjustment gives better explanation to variance albeit
insignificant.
• P-value
The P-Values of the variable provide the likelihood that they are real results
and did not occur by chance and are statistically significant. The lower the
P-Value, the higher the likelihood that that coefficient is valid. With the level
of significance of 0.05, the nominal US Large Cap p-value is close to zero.
It shows that the probability of this regression output is statistically
significant.
In the real rate of return regression of US large markets P value is also close to 0.
Which is also statistically significant.
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3.2. US Mid Cap & US Stock Market
US Mid Cap Vs US Stock

Observations 51
R Square 0.8677
ANOVA
Regression 1 1.528902496 1.5289025 327.817712 2.3889E-23
Residual 49 0.228530124 0.00466388
Total 50 1.75743262
US Mid Cap Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 0.016863695 0.011521636 1.46365455 0.149674331 -0.0062899 0.04001729 -0.0062899 0.04001729
US Stock Market 0.987100411 0.054518654 18.105737 2.3889E-23 0.877541074 1.096659748 0.877541074 1.096659748
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US Mid Cap & US Stock Market

Observations 51
R Square 0.87
ANOVA
Regression 1 1.470771396 1.4707714 338.8092411 1.17867E-23
Residual 49 0.21270907 0.004341
Total 50 1.683480466
Us Mid Cap Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 0.016084117 0.010078585 1.5958706 0.11694788 -0.004169557 0.036337792 -0.004169557 0.036337792
US Stock Market 0.980544998 0.053270884 18.406772 1.17867E-23 0.873493148 1.087596848 0.873493148 1.087596848
US Mid Cap and US Market Cap

For a better interpretation of our analysis, we have taken linear regression analysis of
US Mid Cap and US Market Cap, taking into consideration nominal and real interest
rates separately.
• Multiple R
This represents the multiple correlations between the dependent variable (US Mid
Cap) and the independent variable (US Market Cap). Multiple R for regression
analysis of nominal rate is 0.933 while that of real rate is 0.935 representing
inflation has no impact on the correlation between US mid cap and US market cap.
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• R Square
Also known as the coefficient of determination, R Square tells how well the
regression line approximates the real data. In the case of nominal regression, the
R Square stands at 86.9% whereas for real regression it stands at 87.3%,
suggesting inflation adjusted regression approximates the real data more.
It represents the R Square value, adjusted for the number of predictor variables in
the model. Similar to R Square analysis, for the nominal regression Adjusted R
square is 86.73% and for real regression it is 87.11% showing inflation adjustment
gives shows more variance.
• P-value
The P-Values of the variable provide the likelihood that they are real results and
did not occur by chance and are statistically significant. The lower the P-Value, the
higher the likelihood that that coefficient is valid. P value for Nominal regression is
close to zero, similarly P value for real rate regression is also close to zero. In both
cases, US-Mid-Market and US market are statistically significant. It means they
influence each other.
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3.3. US Small Cap & US Stock Market
US Small Cap & US Stock Market

Observations 51
R Square 0.80
ANOVA
Regression 1 1.742363919 1.74236392 203.9179183 4.32682E-19
Residual 49 0.41867744 0.00854444
Total 50 2.161041359
US Small Cap Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 0.009582808 0.015594886 0.614484 0.541738462 -0.021756289 0.040921905 -0.021756289 0.040921905
US Stock Market 1.05375797 0.073792662 14.2799831 4.32682E-19 0.905466064 1.202049876 0.905466064 1.202049876
Page | 15
US Small Cap & US Stock Market

Observations 51
R Square 0.8047
ANOVA
Regression 1 1.622269902 1.6222699 205.9642372 3.54836E-19
Residual 49 0.385946736 0.0078765
Total 50 2.008216638
Us Small Cap Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 0.01259329 0.01357595 0.9276176 0.358152842 -0.014688603 0.039875184 -0.014688603 0.039875184
US Stock Market 1.029808557 0.071756391 14.351454 3.54836E-19 0.885608691 1.174008424 0.885608691 1.174008424
US Small Cap and US Market Cap

For better interpretation of our analysis, we have taken linear regression analysis of
US Small Cap and US Market Cap, taking in consideration nominal and real interest
rate separately.
• Multiple R
This represents the multiple correlation between the dependent variable (US Small
Cap) and independent variable (US Market Cap). Multiple R for regression analysis
Page | 16
of nominal rate is 0.8979 while that of real rate is 0.8987 representing inflation has
impact on the correlation between US small cap and US market cap.
• R Square
Also known as co-efficient of determination, R Square tells how well the regression
line approximates the real data. In case of nominal regression, the R Square stands
at 80.62% whereas for real regression it stands at 80.78%, suggesting inflation
adjusted regression approximates the real data more.
the model. Similar to R Square analysis, for nominal regression it stands at 80.23%
and for real regression it is 80.38% showing inflation adjustment gives better
explanation to variance albeit insignificant.
• Significance of F
This indicates the probability that the Regression output could have been obtained
by chance. A small Significance of F confirms the validity of the Regression output.
From the analysis we see that for nominal regression, the value stands at close to
zero whereas for real regression it stands also at close to zero. From both cases,
it can be seen that there is 0% probability that the regression output is obtained by
chance, signifying the validity of the regression output.
• P-value
Page | 17
3.4. US Micro Cap & US Stock Market
Page | 18
US Micro Cap and US Market Cap

US Micro Cap and US Market Cap, taking in consideration nominal and real interest
rate separately.
Page | 19
• Multiple R
This represents the multiple correlation between the dependent variable (US Micro
Cap) and independent variable (US Market Cap). Multiple R for regression analysis
of nominal rate is 0.777 while that of real rate is 0.775 representing inflation has
impact on the correlation between US Micro cap and US market cap.
• R Square
adjusted regression approximates the real data less.
the model. Similar to R Square analysis, for the nominal rate of return regression
adj. R square is 59.53% and for real regression it is 59.31% showing inflation
adjustment gives shows less variance.
zero whereas for real regression it also stands at close to zero. From both cases,
• P-value
P value for Nominal regression is close now to zero, similarly P value for real rate
regression is also close to zero. In both cases, US-Micro-Market and US market
are statistically significant. So, one has an impact on another.
Page | 20
3.5. Long term corporate bonds & US Stock Market
Long term corporate bonds & US Stock Market

Observations 49
R Square 0.14
ANOVA
Regression 1 0.068354561 0.06835456 7.829514164 0.00742912
Residual 47 0.410327423 0.00873037
Total 48 0.478681984
Long Term Corp Bond Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 0.051731089 0.016353786 3.16324852 0.002733842 0.018831515 0.084630662 0.018831515 0.084630662
US Stock Market 0.215292015 0.076941477 2.7981269 0.00742912 0.06050573 0.370078301 0.06050573 0.370078301
Page | 21
US Long term corporate bonds and US Market Cap

US Long term corporate bonds and US Market Cap, taking in consideration nominal
and real interest rate separately.
Page | 22
• Multiple R
This represents the multiple correlation between the dependent variable (US Long
term corporate bonds) and independent variable (US Market Cap). Multiple R for
regression analysis of nominal rate is 0.377 while that of real rate is 0.426
representing inflation has impact on the correlation between US Long term
corporate bonds and US market cap.
• R Square
the model. Similar to R Square analysis, for the nominal rate of return regression
adj. R square is 12.45% and for real regression it is 16.43% showing inflation
adjustment gives shows more variance.
zero whereas for real regression it also stands at close to zero. From both cases,
• P-value
P value for Nominal regression is close now to zero, similarly P value for real rate
regression is also close to zero. In both cases, US-Micro-Market and US market
are statistically significant. So, one has an impact on another
Page | 23
3.6. Gold & US Stock Market
Gold & US Stock Market
Regression Statistics Beta -0.2318

Observations 51
R Square 0.022
ANOVA
Regression 1 0.08433186 0.08433186 1.156667727 0.287424898
Residual 49 3.572556799 0.07290932
Total 50 3.656888659
Gold Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 0.126823232 0.045554575 2.78398452 0.007608945 0.035277886 0.218368579 0.035277886 0.218368579
US Stock Market -0.231828742 0.215557416 -1.0754849 0.287424898 -0.665007587 0.201350104 -0.665007587 0.201350104
Page | 24
Gold & US Stock Market
Regression Statistics Beta -0.2666

Observations 51
R Square 0.038
ANOVA
Regression 1 0.108687939 0.1086879 1.952426596 0.168621014
Residual 49 2.727738406 0.0556681
Total 50 2.836426345
Gold Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 0.075232945 0.036091748 2.0844916 0.042349701 0.002703863 0.147762028 0.002703863 0.147762028
US Stock Market -0.266554254 0.190764808 -1.397293 0.168621014 -0.649910489 0.116801981 -0.649910489 0.116801981
Page | 25
Gold and US Market Cap
Gold and US Market Cap, taking in consideration nominal and real interest rate
separately.
• Multiple R
This represents the multiple correlation between the dependent variable (Gold) and
independent variable (US Market Cap). Multiple R for regression analysis of
nominal rate is 0.151 while that of real rate is 0.195 representing inflation has
impact on the correlation between Gold and US market cap.
• R Square
the model. Similar to R Square analysis, for nominal regression it stands at 0.31%
and for real regression it is 1.86% showing inflation adjustment gives better
explanation to variance albeit insignificant.
zero whereas for real regression it stands also at close to zero. From both cases,
• P-value
Page | 26
3.7. US-Large-Cap, US-Mid-Cap, US-Small-Cap, US-Micro-Cap and US-Stock-Market.
ALL Stocks & US Stock Market
Regression Statistics
Multiple R 0.998327126
R Square 0.996657051
Adjusted R Square 0.99636636
Observations 51
ANOVA
Regression 4 1.563877992 0.3909695 3428.576581 2.7152E-56
Residual 46 0.0052455 0.00011403
Total 50 1.569123492
US Stock Market Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept -0.001863816 0.001861336 -1.0013321 0.321904743 -0.005610492 0.00188286 -0.005610492 0.00188286
US Large Cap 0.852576489 0.021190208 40.2344566 1.68292E-37 0.809922813 0.895230164 0.809922813 0.895230164
US Mid Cap -0.065187833 0.033842942 -1.9261869 0.060273675 -0.133310143 0.002934477 -0.133310143 0.002934477
US Small Cap 0.209164977 0.037515785 5.57538591 1.24744E-06 0.133649619 0.284680335 0.133649619 0.284680335
US Micro Cap 0.002473715 0.018927008 0.13069763 0.896584417 -0.035624376 0.040571806 -0.035624376 0.040571806
In this regression analysis, US Stock market is the dependent variable and US large
cap, Mid Cap, Small Cap and Micro Cap are the independent variables. From the
regression statistics, Multiple R is the correlation between dependent and independent
Page | 27
variable. The value of Multiple R is 0.998327 which is close to +1. So, we can say
there is a strong positive correlation between dependent and independent variable.
R-square represents the proportion of the variance for a dependent variable that is
explained by an independent variable or variables in a regression model. The value of
R Square is also close to +1 in this case. Residual is the variance of (ei) which is
0.0052455.
The lower portion estimates the relationship between the independent variables and
the dependent variable. These estimates tell the amount of increase in US-Stock-
Markets that would be predicted by a 1 unit increase in the predictor or independent
variables and vice versa.
Among the independent variable only p-value of US-Micro- Cap is more than .05 which
means it is not statistically significant. Apart from that the other three variable- US-
Large-Cap, US Mid-Cap and US-Small Cap has strong influence on US-Stock-Market.
This figure shows the different risk return relationships of each stock. The dispersion
is high when nominal data has been used. Among US-Large-Cap, US-Mid-Cap, US-
Small Cap, and US Stock-Market, US-Large-Cap has higher dispersion than others.
Page | 28
ALL Stocks & US Stock Market
Regression Statistics
Multiple R 0.998428494
R Square 0.996859458
Adjusted R Square 0.996586367
Observations 51
ANOVA
Regression 4 1.524909435 0.3812274 3650.287761 6.45669E-57
Residual 46 0.00480413 0.0001044
Total 50 1.529713565
US Stock Market Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept -0.001804582 0.001613414 -1.118487 0.269166168 -0.005052216 0.001443051 -0.005052216 0.001443051
US Large Cap Real 0.853080753 0.020822243 40.969686 7.4802E-38 0.811167751 0.894993754 0.811167751 0.894993754
US Mid Cap Real -0.064696888 0.033391948 -1.9375 0.058838137 -0.131911392 0.002517617 -0.131911392 0.002517617
US Small Cap Real 0.207256326 0.037029228 5.5971009 1.15803E-06 0.132720356 0.281792297 0.132720356 0.281792297
US Micro Cap Real 0.002940397 0.018622736 0.1578929 0.875232306 -0.034545227 0.040426021 -0.034545227 0.040426021
To explain this analysis, US Stock market is the dependent variable and US large cap,
Mid Cap, Small Cap are the independent variable. From the regression statistics,
Multiple R is the correlation between dependent and independent variable. The value
of Multiple R is 0.9984 which is close to +1. So, we can say there is a strong positive
correlation between dependent and independent variable.
R-square represents the proportion of the variance for a dependent variable that is
explained by an independent variable or variables in a regression model. The value of
R Square is also close to +1 in this case. Residual is the variance of (ei) which is
0.00480.
The lower portion estimates the relationship between the independent variables and
the dependent variable. These estimates tell the amount of increase in US-Stock-
Markets that would be predicted by a 1 unit increase in the predictor or independent
variables and vice versa.
Page | 29
Here the p-value of US-Micro- Cap is more than .05 which means it is not statistically
significant. Apart from that the other three variable- US-Large-Cap, US-Mid-Cap and
US-Small Cap has strong influence on US-Stock-Market as those have p-value less
than .05.
This figure shows the different risk return relationships of each stock. The dispersion
of real return data is less than the dispersion of nominal return data.
Page | 30
4. Calculation Summary
Summary of the overall calculations on Nominal and Real rate of return are in the
following-
Nominal Income data:
Nominal Income summary
Long-
Term
Description US Large Cap US Mid Cap US Small Cap US Micro Cap Gold
Corporat
e Bonds
US Stock Market Coefficient 0.9828 0.9871 1.0538 1.0784 0.2153 -0.2318
Market Variance 0.0314 0.0314 0.0314 0.0314 0.0307 0.0314
Systematic variance
0.0303 0.0306 0.0348 0.0365 0.0014 0.0017
( beta^2*var_m)
Firm specific variance
0.0005 0.0047 0.0085 0.0245 0.0087 0.0729
( var_e )
Total Variance 0.0308 0.0352 0.0434 0.0610 0.0102 0.0746
Total RISK ( SD ) 0.1755 0.1877 0.2083 0.2469 0.1008 0.2731
Intercept 0.0015 0.0169 0.0096 0.0211 0.0517 0.1268

R Square 0.9846 0.8700 0.8063 0.6034 0.1428 0.0231
Adjusted R Square 0.9842 0.8673 0.8023 0.5953 0.1246 0.0031
Calculated R Square 0.9843 0.8677 0.8031 0.5986 0.1402 0.0221
Correlation with US market 0.992 0.933 0.898 0.777 0.378 -0.152
Standardized coefficient or market coefficient is the Beta of the stock. Beta measures
the portfolio risk. US-Large-cap and Mid-cap has almost similar beta which is lower
than the US Small-cap and US-Micro –cap. In case of variance US-small-cap and US-
micro –cap has higher value than the US-large-cap and Mid-cap. As, we have seen
earlier that US-small-cap and US micro-cap have higher return and have higher
standard deviation and variances as well.
The correlation Value of US-large-cap is .992 which shows the highest strong positive
relation with the US-Stock-market. As US-large-cap occupies almost 85% of investible
market capitalization so the strong relation is obvious in this case. Next is US-Mid-cap
which has correlation value .933 which also indicated strong positive relation.
Correlation value of US- Small-Cap is .898 which is also close to +1. And US- Micro-
Cap has correlation value of .777. So, all of the stock has positive correlation with the
Page | 31
US Market. Long-Term Corporate Bonds also has positive correlation value .378
where Gold has negative correlation with the US Market which is -0.152.
Real Income Data:
Real Income summary
Long-
Term
Description US Large Cap US Mid Cap US Small Cap US Micro Cap Gold
Corporat
e Bonds
US Stock Market Coefficient 0.9891 0.9805 1.0298 1.0485 0.2651 -0.2666
Market Variance 0.0306 0.0306 0.0306 0.0306 0.0296 0.0306
Systematic variance
0.0299 0.0294 0.0324 0.0336 0.0021 0.0022
( beta^2*var_m)
Firm specific variance
0.0004 0.0043 0.0079 0.0228 0.0096
( var_e ) 0.0557
Total Variance 0.0304 0.0338 0.0403 0.0564 0.0116 0.0578
Total RISK ( SD ) 0.1743 0.1837 0.2008 0.2375 0.1079 0.2405
Intercept 0.0005 0.0161 0.0126 0.0250 0.0174 0.0752

R Square 0.9857 0.8736 0.8078 0.6013 0.1818 0.0383
Adjusted R Square 0.9854 0.8711 0.8039 0.5931 0.1643 0.0187
Calculated R Square 0.9854 0.8714 0.8047 0.5964 0.1786 0.0376
Correlation with US market 0.9095 0.8498 0.8988 0.7754 0.4263 -0.1958
The variance of returns represents the total risk of an asset – how much, on average,
that returns deviate from the average return. Beta measures portfolio risk. That is, beta
for an asset, with respect to a given portfolio, represents the contribution of the asset
to the variability of a portfolio.
After the inflation adjustment we get Real Return Data. From this calculation we
get-
US-small-cap and US-micro-cap has higher beta than US-large-cap and Mid-cap beta.
They have higher variance as well. The Correlation Value of US-large-cap is .9095
means strong positive relation with US market. US-Mid-Cap, Small Cap, and Micro-
Cap also have positive relation with the US-Stock-Market. Long-Term Corporate
Page | 32
Bonds also has positive correlation value .378 where Gold has negative correlation
with the US Market which is -0.1958.
Similarities and differences among stocks

US Large cap includes U.S. companies that comprise the top 85% of investable market
capitalization. So, it is very natural and through the regression analysis, we also found
that “US Stock Market” has 98.36% reflection of “US large Cap”. As “US stock market”
can be explained by 98.36% through “US large cap”, it is more obvious that correlation
among these two will be strongly positive, which is .9095. “US Stock market” can be
explained through “US Mid Cap” by 86.73%, meaning these two will be loosely
correlated then “US large Cap”.
We have seen that, the more an independent variable can be explained by dependent
variable, the more they are likely to be correlated.
We also found that systematic risk and unsystematic risk for varies one to another.
We have found similarity that each segment is giving return more the risk increases.
But incremental reward to the risk is not proportionately same across all
segments/stocks.
The greater the risk, the more the reward. But that does not guarantee that reward to
ratio (sharp ratio) will also be higher if risk increases. Here we found that “US Mid Cap”
gives more reward compared to any other options, although “US Mid Cap” risk is not
highest, and reward is also not highest.
We have seen that inflation decreases real rate of return. As per exact calculation, real
rate of return penalized more because of inflation. We have found similarities all across
the stocks. We also found similarities that the more the risk premium, the less sharp
ratio adjusted for inflation. As we seen that Risk premium of “US Micro Cap” was
highest across the stocks but after adjustment of inflation, “US Micro Cap” share ratio
lowered or reduced less.
THE END
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North South University

School of Business & Economics

Group Project Report

Risk-return Properties of Some US

Submission Date: 24th December 2022

1.1. Rate of Return

1.2. Risk/Standard Deviation

Nominal SD 17.54% 17.37% 18.56% 20.58% 24.35% 9.88% 26.78%

1.3. Risk Premium

1.4. Sharp Ratio

Figure 1.4. (a): Graph for Sharpe Ratio Comparison

Nominal Skew -0.76 -0.74 -0.71 -0.39 0.07 -0.99 1.90

Fig 1.5. (a): Skewness of different U.S. Asset Classes.

Nominal Kurtosis 0.05 0.09 0.54 -0.12 0.47 3.51 6.27

Fig 1.6. (a): Kurtosis of different U.S. Asset Classes.

Covariance matrices stand for representing covariance values of each pair of

Long Term Corp

Gold -0.00910 -0.00807 -0.00674 -0.00645 -0.00135 0.07314

US_Large_Cap_R US_Mid_Cap_Re US_Small_Cap_R Long Term Cor

US_Large_Cap_Real 0.03037 0.02908 0.02968 0.02947 0.00812 -0.00936

Gold -0.00954 -0.00910 -0.00842 -0.00843 -0.00177 0.05562

3.1. US Large Cap & US Stock Market

3.1.1. Regression Analysis on Nominal Rate of Return

US Large Cap & US Stock Market

Regression Statistics Beta 0.983

US Large Cap & US Stock Market

3.2.1. Regression Analysis on Nominal Rate of Return

US Mid Cap Vs US Stock

Regression Statistics Beta 0.987

US Mid Cap & US Stock Market

Regression Statistics Beta 0.9805

US Mid Cap and US Market Cap

3.3.1. Regression Analysis on Nominal Rate of Return

US Small Cap & US Stock Market

Regression Statistics Beta 1.05

US Small Cap & US Stock Market

Regression Statistics Beta 1.0298

US Small Cap and US Market Cap

3.4.1. Regression Analysis on Nominal Rate of Return

US Micro Cap and US Market Cap

3.5.1. Regression Analysis on Nominal Rate of Return

Long term corporate bonds & US Stock Market

Regression Statistics Beta 0.215

US Long term corporate bonds and US Market Cap

3.6.1. Regression Analysis on Nominal Rate of Return

Gold & US Stock Market

Regression Statistics Beta -0.2318

Gold & US Stock Market

Regression Statistics Beta -0.2666

3.7. US-Large-Cap, US-Mid-Cap, US-Small-Cap, US-Micro-Cap and US-Stock-Market.

3.7.1. Regression Analysis on Nominal Rate of Return

ALL Stocks & US Stock Market

ALL Stocks & US Stock Market

Nominal Income data:

Nominal Income summary

Intercept 0.0015 0.0169 0.0096 0.0211 0.0517 0.1268

Real Income Data:

Real Income summary

Intercept 0.0005 0.0161 0.0126 0.0250 0.0174 0.0752

Similarities and differences among stocks

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