explanatory Essay

825 words

There are a lot of items that go into buying and investing in a company. One of the hardest decisions for a shareholder is deciding if the investment is going to be profitable. Once a shareholder decides to buy or invest in an organization the next step would be deciding how much to pay or invest. Another hard decision is if the investment that was made goes bad can you get out of this obligation. Throughout the course of the paper I will illustrate some of the items that assist with this decision process. The items that are covered in this paper are the cost of equity, the cost of debt, and the weighted average cost of capital. All three of these items assist in the decision process. Most companies use Capital Asset Pricing Model (CAPM), which is a model that is utilized to calculate the required rate of return. The main reason for utilizing this model is that the rate of return injuctively authorized by equity investors will be a function of the jeopardy of the equity where risk is quantified by a variable beta (McGladrey & Pullen, 2010). The equation used to deduce the Cost of Equity (CoE) = Risk-Free Rate of Return + (the market risk premium – Risk-Free Rate of Return) x beta coefficient (unsystematic risk) (Investopia, 2016).
Re = Rf + β (Rm - Rf) Rf = 2.32% β = 0.95 Rm = 13.96%
Re = 2.32% + 0.95 (11.72% -
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- Explains how the cost of equity, debt, and weighted average costs of capital assist in the decision process.
- Explains that most companies use capital asset pricing model (capm), which is a model that is utilized to calculate the required rate of return.
- Explains that amazon.com inc's interest expense (positive number) was $459 mil and its total book value of debt (d) is $13336 mil.
- Explains that the weighted average cost of capital (wacc) is the rate that a company is expected to pay to all its security holders to finance its assets.
- Explains the cost of debt finance, wdebt 6.96%, and the income tax rate, t 36.0.
- Explains the importance and value of weighted average cost of capital (wacc) as a financial tool for companies and investors.

One of the key rates used to figure out the CoD is the current market rate Amazon (AMZN) is paying on its debt. If AMZN is not paying market rates then one should be estimated (Investopedia, 2016). Because companies like AMZN profit from tax deductions obtainable on interest paid, the net CoD is the interest paid minus tax savings resulting from the tax-deductible interest payment (Investopedia, 2016). As of Dec. 2015, Amazon.com Inc 's interest expense (positive number) was $459 Mil. Its total Book Value of Debt (D) is $13336 Mil (GuruFocus,

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- The Cost of Equity Capital and the Capital Asset Pricing Modelexplanatory essayWhen discussing the cost of equity capital, or the rate of return required by investors for their share expenses, there are three main models widely used for analyzation. These models are the dividend growth model, which operates on the variable of growth and future trends, the capital asset pricing model (CAPM), which operates on the premise that higher returns are a result of higher risk, and the arbitrage pricing theory (APT), which has a more flexible set of criteria than CAPM and takes advantage of mispriced securities
#### In this essay, the author

- Explains that the capm is the best method of determining the cost of equity for general mills, inc.
- Explains the current cost of equity at 5.96% will be re=rf+beta (rm-rf); re = 3.15% +0.18
- Explains that when the above calculations are expanded from left to right, new assumptions are introduced by each of these variables.
- Explains that the capm's most uncertain assumption is the rm (expected aggregate market return).
- Explains the three main models used for analyzing the cost of equity capital, such as dividend growth, capital asset pricing, and arbitrage pricing theory.
- Explains that apt is more precise than the capm, although it requires more assumptions. the model takes the opinion that investors are unique and motivated by several factors.
- Explains that dividend growth models need significant projections of future events in order to be accurate. however, they do not have the luxury of past trends on which to base a future value.
- Explains how capm calculates the cost of equity estimate for nike, sony, and mcdonalds.
- Explains how the three models, dividend growth, capm, and apt, have been analyzed as to each model’s ease of use and effectiveness.

1469 wordsRead More - Ford Motor Companyanalytical essayBrealey, Richard A., and Myers, Stewart C. Principles of Corporate Finance. Sixth ed. McGraw Hill, New York, © 2000.
#### In this essay, the author

- Explains that the automobile industry began with henry ford's production of the model t in the early 1900s. with the assembly line, cars became cheaper and quicker to produce.
- Explains that the industry is a global producer of automobiles, which is evident in the recent acquisition of chrysler by daimler-benz.
- Predicts that the global car market will grow to 64 million vehicles by the year 2002. the automobile industry will see more changes than it has in the last 100 years.
- Explains that the oversized vehicle was the body-style of choice among american consumers. japan's efficiency at producing this type of car allowed them to take 30% of the u.s. automobile market away from american manufacturers.
- Explains that the luxury vehicle segment has grown more competitive, yet maintains large profit margin potential. american buyers have been showing increased interest in european and japanese manufacturers.
- Explains that the sport utility vehicle segment has emerged as one of today's hottest markets through its increased sales. north-american consumers in higher income brackets are choosing suv’s in their garages.
- Explains that minivans market share was 8% in 1998, which was down 12% from 1991, due to a shift in consumer demand away from these vehicles.
- Explains that pick-up trucks, uniquely american vehicles that span all of the consumer target markets, show good potential for domestic manufacturers.
- Explains that the largest and most important product segment in the automotive industry is mid-size cars. popularity for midsize vehicles is due to consumers’ preference for luxury cars they cannot afford and compacts that they do not like.
- Explains that all these vehicle segments combine to form an industry in which consumers have continuously changing tastes. manufacturers who can compete worldwide, profit and growth potential will be ever present.
- Explains the history of ford, which began with the first car sold in 1903 and the millionth car produced in 1917. ford's finance subsidiary, ford motor credit, was formed in 1959.
- Explains that ford's three major subsidiaries are hertz, ford credit, and visteon.
- Explains that ford's prime focus in the 21st century will be on the consumer. ford has made a deal with microsoft to take advantage of the msn carpoint service.
- Explains that general ford has shown a steady pattern of sales growth from 1994 to 1997, growing at 5-7% each year. however, in 1998 sales were down 6%.
- Analyzes how ford's borrowing can be explained by its leverage ratios, and their debt-to-equity ratio, which is up from past years.
- Explains that ford's current ratio of.41 indicates that they have many current liabilities. this number is lower than the industry average, and their quick ratio has trended upward over the last 4 years.
- Evaluates ford's efficiency by examining its asset turnover ratio and days inventory held ratio, which show how effectively it is using its assets.
- Analyzes how ford's profitability is measured by the net profit margin, rate of return on assets (roa), payout ratio, and rate-of-return on common shareholder’s equity.
- Explains that ford's 1998 price/earnings ratio of 12.64, meaning investors are willing to pay $12.64 per dollar of earnings, has more than doubled from 1997, a positive signal from investors to ford management.
- Explains that the united auto workers (uaw) union represents the ford motor company's workforce. the company has $22 billion in cash to limit the threatening power of its unionized employees.
- Explains that interest rate fluctuations affect individuals' willingness to spend large amounts of disposable income and are a concern to ford. ford will spend $74 million to comply with pollution and hazardous waste control standards.
- Analyzes how ford has come to possess many strengths, such as their brand name, economies of scale, and diversified subsidiaries. ford's product lines reach all target markets.
- Explains that ford's large size could be a source of weakness to them because of bureaucracy, red tape, and timely reactions to changes in the industry.
- Opines that the opportunities for ford lie in their ability to lead the automotive industry in a global expansion. internet and e-commerce are examples of technological opportunities available to ford.
- Explains the threats facing ford include an increasing number of well-informed consumers attributable to the availability of information on the web. honda, gm, and chrysler are ford's main competitors.
- Explains that ford has been a leader in the automobile industry for the past 5 years. their 17.11% long-term annual growth rate shows they don't face going concern problems and expect to be profitable for many years to come.
- Compares ford's current stock price with its 52-week low of $40.25, and its high of $67.875. with 1,222 million shares outstanding, ford has a market capitalization of $54,531 million.
- Analyzes how a regression analysis of ford yields an accurate beta of 1.0151, compared with well-known financial news providers' estimates.
- Cites the following sources: http://www.askjeeves.com, cnbc, and msn.

3002 wordsRead More - Like most economic evaluations, the decision to purchase a share of a company’s stock is based on an individual’s willingness to pay versus the current selling price of the share. Fundamentally, the willingness to pay is determined by a valuation of that share of stock. For a given share of common stock, the willingness to pay is, or should be, linked to the present value of the stream of future cash flows that the investor will receive from expected dividends and through any expected capital gain for selling the share at a higher price than at which it was purchased.[i] Thus, there are three main factors the affect the valuation of a share of common stock: future dividends, future market price of the share, and the discount rate used.
#### In this essay, the author

- Explains that the discount rate used to value the anticipated future cash flows of a share of stock to the present involves several factors.
- Explains that the risk-free rate is the return on your investment that you could earn securely if the money were to be put into a "risk free" investment.
- Explains stanley levine and dirk van dijk's handbook of security analyst forecasting and asset allocation.
- Analyzes bierman, harold, the causes of the 1929 stock market crash: a speculative orgy or
- Opines that patel, alpesh b., the mind of a trader: lessons in trading strategy from the world’s
- Explains that the us financial markets make headline news on a daily basis, so people are well aware when the domestic stock market’s indices rise or fall. a return of 99.35% on an investment is excellent.
- Explains that the decision to purchase a company's stock is based on an individual’s willingness to pay versus the current selling price of the share.
- Explains that dividends are claims on net income, and a rational investor examines and predicts the company's ability to generate earnings into the future.
- Explains that market price is linked to the overall willingness to pay for a share of the company's stock amongst all investors in the stock market, and potential new investors.
- Argues that if changes in the discount rate are to explain dramatic increase in stock prices, it must be due to a drop in equity risk premium.
- Cites the equity risk premium: the long-run future of the stock market, bradford cornell, john wiley & sons, new york, 1999.
- Explains that the rising stock prices produced during the sample 1997 - 1999 bull market cannot be explained merely by a fundamental rise in the valuations of stocks.

2368 wordsRead More - Nike: Company Financial Analysisexplanatory essayObviously, this case aims to evaluate Joanna’s analysis. Throughout the analysis, we will estimate the cost of debt, cost of equity, and cost of capital through different financial analysis models.
#### In this essay, the author

- Explains that the shares outstanding are 271.5 and $42.09 the current price of share.
- Explains the 6.75% coupon rate paid semi-annually from july 15th, 2000 until january15, 2001.
- Explains that the next step would be calculating the market value and along with nike's capital structure.
- Explains that the wacc equation is the cost of each capital component multiplied by its proportional weight and then summing.
- Explains that using the market values of debt and equity calculated above, they calculate the eights of both.
- Explains the sensitivity analysis revealed that nike was undervalued at a discount rates below 11.17%, when we calculated the wacc our solution was 9.87%.
- Explains how kimi ford, a portfolio manager at northpoint group, was considering buying share for the fund with an emphasis on value investing.
- Explains that cohen calculated a weighted average cost of capital (wacc) of 8.4% using the capital asset pricing model (capm).
- Opines that cohen used the book value as an estimate to the market value of both equity and debt in her calculations, which is considered a wrong method to calculating cost of capital.
- Explains that cohen uses the book value of debt presented on the balance sheet as an estimate to the current market value, whereas i used the yield to maturity of a twenty-year debt using the 6.75% coupon paid semi-annually.
- Recommends using the same yield to maturity on u.s treasuries used by cohen as the risk free rate to calculate wacc.
- Explains that nike inc. rejected the dividend discount model because it does not reflect the true cost of capital.
- Explains that the earning capitalization model is an approach to find out the cost of capital, but it doesn't take the growth factor into consideration.

1135 wordsRead More - Silicon Valley Medical Financial Analysisexplanatory essayIn SIVMED’s case, based on the definition of WACC, all capital bases should be included in its WACC. These include its common stock, preferred stock, bonds and long-term borrowings. In addition to being able to compute for the costs of capital, the WACC also determines how much interest SIVMED has to pay for all its activities. The value of the firm’s stock, which we want to maximize, depends of the after-tax cash flow. Hence, after-tax values for WACC are also needed. Furthermore, cost of capital is used to determine the cost of each debt, stock or common equity. Being able to analyze these will be essential into deciding what and how new capital should be acquired. Hence, the present marginal costs are ideally more essential than historical costs.
#### In this essay, the author

- Explains that flotations should be part of the calculation of debt cost, since flotation costs are typically included in the component.
- Explains that the ear (6.6%) can deal with debts of different payment frequencies. however, nominal rates should be used because the total costs, which are naturally small, decrease the net proceeds from the sale.
- Explains coupon rates differ from 15-year and 30-year bonds because they consider the risk of the bond. the longer the maturity time, the higher the cost of debt.
- Explains how to calculate the cost of debt when the outstanding debt has not been traded by using a synthetic rating based upon the company’s financial ratios.
- Explains that a callable bond, which can be bought back by the issuer before its maturity, can reduce the cost of debt when the interest rate decreases.
- Explains that the company is rumoured or actually not performing well in terms of its income stream for the past several years. they borrow money to cover any shortfall in their income flow.
- Explains that sivmed will have a higher cost of preferred stock with mandatory redemption provision.
- Explains that this cost reflects the opportunity cost the company incurs when it decides to retain its earnings.
- Explains that the t-bond rates are generally a better estimate of the risk-free rate because transactions under the rate are greater in denomination and longer maturity periods. however, they are more reliable since they do not carry any maturity risk.
- Explains historical betas are past standard deviations of one security, and adjusted historical betas approximate securities’ future beta
- Explains that the company can get analysts to calculate the expected rate of return, and subtract the current risk-free rate. the other way is to obtain other competing companies’ discounted cash flow and deduct the t-bond yield.
- Explains that sivmed's cost of retained earnings is 14.8% using the discounted cash flow method.
- Explains that the estimated growth rate was computed for using a method involving retention rate or its complement, the payout rate.
- Explains that the dividend growth rate was acquired through the use of percentage change, or in this case increase, in dividends throughout the years.
- Explains the bond-yield-plus-risk premium approach for using an estimate for the risk premium, giving an estimated value for cost of equity of 14%.
- Explains that the final estimate for k is 14.67%. when the values used using certain methods seem inferior or less important, less weight is given to it.
- Explains the estimated cost of retained earnings, which is 14.8%, but the estimate cost for new common stock must be adjusted by the 30% flotation costs.
- Explains that sivmed's wacc is 11.78%, and the retained earnings break point is $3,000,000. to raise a dollar of new capital, it would have to use $900,000 of debt, $350,000 of preferred stock and $1,800,000.
- Opines that as more capital is required in any year, the wacc would eventually rise above 11.78% and the company would have to find new buyers for its stocks.
- Explains that the mcc schedule has a major influence on the cost of capital that is used in capital budgeting analysis.
- Explains that sivmed's corporate cost of capital should be used by both divisions, but adjustments for market risk, volatility and project’s peculiarities must be made.
- Compares sivmed's debt, preferred stock, and common stock weights.
- Explains sivmed's market value weights: debt, preferred stock, and common stock.
- Recommends using the market values weights since they are closer to the target capital structure.
- Explains that the wacc is computed by multiplying the costs per component to its respective proportional weight. financial management is focused on the maximization of the stock price.

1403 wordsRead More - Home Depot & Capital Structureargumentative essayBerk, J., & DeMarzo, P. (2011). Corporate finance: The core, second edition. (2nd ed.). Boston, MA: Prentice Hall.
#### In this essay, the author

- Compares home depot to lowes, a home improvement retailer specializing in high volume and low cost strategy.
- Compares hd and lowes total debt (short term & long term) plus available cash versus hd.
- Explains that table 3 calculates the required returns associated with hd. the parameters are from march 10, 2014. this will act as the baseline to demonstrate the effects changing a firm’s balance between equity and debt financing and its associated effects.
- Explains modigliniani and miller's findings that a firm’s choice of financing does not affect its value.
- Explains the impact of reducing debt by $1 billion through equity. the expected return has increased from 16.83% to 16.93%, however the overall wacc remains at 12%.
- Explains that wacc is unaffected while required equity return becomes less. the choice of financing affects the required return on equity.
- Explains that debt financing may be less, but it increases the likelihood of default and therefore elevates a firm’s risk. elevated risk requires greater return to attract equity investment.
- Analyzes how modigliniani and miller demonstrate how a company chooses to structure its capital (equity vs. debt) does not impact the overall value.
- Opines that berk, demarzo, & demaria, p. (2011). corporate finance: the core, 2nd ed.
- Explains that finding the perfect capital structure in terms of risk and reward can ensure a firm meets shareholder expectations and protects in times of recession.

987 wordsRead More - Capital Asset Pricing Model Essayanalytical essaySo this raises the question what is the CAPM model useful for and how effective is it when estimating cost of capital? Scholars such as Perold (2004) have answered this question through testing and analysis, they have found that even if the model does not give us an accurate real world result in estimating todays cost of capital, it can aid us in predicting future investor behaviour. I would agree with this conclusion of CAPM and Perold’s view on its effectiveness when estimating cost of capital and explaining performance of investment portfolios when given incorrect variables. However, on this note I do not argue that CAPM is theoretically incorrect but from a investors point of view it is questionable, scholars such as Levy (2010) have also stated this within their research of CAPM backing up their argument with thorough testing and analysis within his journal ‘The CAPM is alive and
#### In this essay, the author

- Explains that they will compare and contrast the effectives of capital asset pricing model (capm), arbitrage pricing theory, and the fama-french three factor model when estimating capital costs and explaining portfolio performance.
- Explains that today's widely used capm model was originally developed by sharpe (1964) in order to explain how capital markets set share prices.
- Argues that capm results are always correct in a technical sense, but whether it is accurate to reality is questionable. we can only achieve an effective result if variables such as beta and expected returns are correct.
- Explains that if the beta we are using is incorrectly computed on an inaccurate index and expected return then on the basis of this there is an efficient market portfolio (m), in which expected returns have the following linear relation
- Explains that the capm model is still practical if we are given incorrect variables. guermat argues in his journal that we can still use it.
- Concludes that capm is not theoretically incorrect but from an investors point of view it is questionable.
- Explains that scholars zhi da, re-jin guo, and ravi jagannathan have proposed certain adjustments of capm to increase its efficiency when estimating cost of capital.
- Explains that the arbritrage pricing theory (apt) was introduced by ross in 1976 as alternative option to capm.
- Explains that a fundamental weakness of apt is that of price approximation. shanken (1982) argues that the pricing of portfolios is of more significance rather than individual assets.
- Explains that the measurement of certain financial variables is another drawback for apt in terms of its accuracy when estimating cost of capital and explaining investment portfolios.
- Explains that apt is becoming a more commonly used model than capm, but both models can give very close results for certain industries.
- Explains that connor & korajczyk tested 130 mutual funds from january 1968 until december 1982. they found that apt was not sensitive to the number of risk factors above five, and that the capm approach of measuring portfolio investment were more related to average returns.
- Explains that apt is effectively applicable when explaining performance of investment portfolios. ramadan (2012) found that macroeconomic variables and market indicators explained 84% of the variation in returns on his chosen market portfolio.
- Explains the fama and french three-factor model as a deviation of capm.
- Explains that the ff three-factor model allows us to see the effect of the size and book to market equity in correlation to effects on portfolio returns.
- Explains that the fama and french three-factor model is widely accepted as a capm empirical successor, and argues that it is much more effective.
- Explains that the ff three-factor model has been tested by a number of scholars and achieved different results.
- Analyzes dolinar's research and testing of asset pricing models in the croatian stock market. griffin and lemon (2002) suggested the ff three-factor model was best applied on a country specific basis.
- Concludes that capm, apt and the fama french three-factor model are more effective in the real world when estimating cost of capital and explaining investment portfolios.

1608 wordsRead More - Essay On Capital Asset Pricing Modelopinionated essayCapital Asset Pricing Model (CAPM) is an ex ante concept, which is built on the portfolio theory established by Markowitz (Bhatnagar and Ramlogan 2012). It enhances the understanding of elements of asset prices, specifically the linear relationship between risk and expected return (Perold 2004). The direct correlation between risk and return is well defined by the security market line (SML), where market risk of an asset is associated with the return and risk of the market along with the risk free rate to estimate expected return on an asset (Watson and Head 1998 cited in Laubscher 2002).
#### In this essay, the author

- Explains capital asset pricing model (capm) is an ex ante concept, built on the portfolio theory established by markowitz. it enhances the understanding of elements of asset prices, specifically the linear relationship between risk and return.
- Opines that capm is a useful model for determining asset investments despite all the evidence against it.
- Explains that capm can be used as a benchmark for understanding the capital market phenomena that cause asset prices and investor behavior to deviate from the prescriptions of the model.
- Argues that capm is an inadequate and misleading model with several shortcomings that make it unacceptable by various academics.
- Opines that capm is a useful model to estimate an assets return and make moneymaking investment decisions, but it should be used in conjunction with other multi-factor models.

1344 wordsRead More - Financial Analysis of Verizon versus AT&Topinionated essayYou would not buy a home, car or other large purchases without researching what product offered you the most for your money. The same is true when investing in a company. Investors do avid research on multiple companies to find what company matches the investors' criteria. In this paper Team C will research both AT&T and Verizon's financial documents. Team C will compare selected ratios, cash flow and make recommendations how both companies can manage cash flow for the future.
#### In this essay, the author

- Explains that investors do avid research on multiple companies to find what company matches the investors' criteria. team c will research at&t and verizon's financial documents.
- Describes at&t's cash generated from operating, investing, and financing activities over the past three years.
- Explains that verizon has not been heavily investing as of lately. their plans are to continue to throw fiber optic lines that can deliver cable, telephone, and high speed internet.
- Concludes that organizations' ratios, cash, debt, liquidity of assets and management aid investors in their decisions, not names.
- Explains that ratio analysis is useful when judging the performance of a company by weighing and evaluating the operating performance.
- Explains that at&t has seen a surge in internet and wireless subscriptions helping operating activities earn almost double from past year. recent upgrades to the network have also caused financing activities to be in the negatives.
- Opines that the future of the telecommunication industry is an exciting future. the companies need to find other avenues, packages and services that can be sold to existing customers while attracting new customers.

1338 wordsRead More - Stock Asset Returns Are Predictable Part 2explanatory essay5. DATA SOURCES, METHODOLOGY AND VARIABLE CONSTRUCTION 5.1. Return Calculation There are two ways to calculate stock returns 5.1.1. Continuous Return This is the percentage return that would be earned by an investor who bought the stock at the end of a particular day/month t-1 and sold it at the end of the following day/month.
#### In this essay, the author

- Defines day return r at as the percentage return that would be earned by an investor who bought the stock at the end of a particular day/month t-1 and sold it.
- Explains that rt is the rate of return during the period (t-1,t) and the price at time t.
- Explains that a continuously compounded return is the appropriate return measure, and not discretely.
- Explains that the research study consists of four sections based on information set of return predictability.
- Explains that sort-term return predictability includes both non-parametric and parametric approaches to test the weak form of stock market efficiency.
- Explains that non-parametric stock market efficiency tests: both run test and autocorrelation function will be discussed in 5.2.1.
- Explains that a parametric stock market efficiency test: arima model will be discussed in the 5.2.2 section.
- Explains how the daily and weekly kse 100 indices data sets are used to find return predictability through market efficiency tests.
- Explains n is the total number of price changes, and ni are the numbers of prices of each sign.
- Explains that, for a purely white noise process the autocorrelation at various lags hover around zero.
- Summarizes box and jenkins' four-stage univariate box-jenkins process for selecting a good model.
- Explains that the simplest ways to state autoregressive of order one ar (1) model may also be estimated as:
- Explains that the model looks like the markov first order autoregressive model. if 1, rt becomes non stationary series, a unit root problem occurs in the returns.
- Explains that the most widely used model of serial correlation is the first-order autoregressive model.
- Explains that the value of r at time t depends on its value in the previous time period and a random term; the r values are expressed as deviations from their mean value.
- Explains that rt follows a random walk model with drift because the presence of its constant parameter, pare the parameters of autoregressive coefficients and ut is an uncorrelated random error term.
- Explains that moving average process of order q is created by a weighted average of random error term and written its equation as:
- Explains that moving average process is simply a linear combination of white noise error term.
- Explains the success of the widely accepted arima models in forecasting, which is more authentic than other econometric models.
- Explains that the run test is a non-parametric test whereby the number of successive positive and negative returns is tabularized and compared against its sampling distribution under the random walk hypothesis.
- Explains how to find out the number of runs (consider the signs of prices whether positive, negative or no change).
- Explains the autocorrelation function test, which evaluates the correlation between the current and lagged observations of the time series of stock returns.
- Explains that k =0, 0 =1, since both covariance and variance are measured in the same units of measurement, the graph is known as the correlogram.
- Explains that forecasting return volatility is a crucial and thought-provoking financial problem that has garnered attention.
- Explains that the identification stage uses two graphical devices to estimate the correlation between the observations within a single data series.
- Explains that the next step is to estimate the parameters of autoregressive (ar) and moving average (ma).
- Explains that there are ‘p’ autoregressive terms and ‘q’ moving average terms. the intercept parameter is related to the mean of rt and the errors are assumed to be uncorrelated random variables with zero mean and constant variance.
- Explains that is an intercept term and is assumed to be uncorrelated random variables, an unknown parameter of autoregressive model and a moving average process.

1827 wordsRead More