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Q: Risk free rate and Return on the market for the UK ( Answered 5 out of 5 stars,   0 Comments )
Question  
Subject: Risk free rate and Return on the market for the UK
Category: Business and Money > Finance
Asked by: redshep-ga
List Price: $10.00
Posted: 26 Apr 2005 08:09 PDT
Expires: 26 May 2005 08:09 PDT
Question ID: 514424
Hello,
In order to calculate the Capital Asset Pricing Model for UK companies
I need the 'Risk Free Rate' (for 5 and 10 year) and the 'Return on the
Market' (not sure if this has a time scale?) for the UK.  I need to
know where the answers were taken from for referencing purposes.

I hope that makes sense, I am struggling with finance.

Red
Answer  
Subject: Re: Risk free rate and Return on the market for the UK
Answered By: omnivorous-ga on 26 Apr 2005 09:16 PDT
Rated:5 out of 5 stars
 
Redshep --

Motley Fool, an investment site, has both a definition of the U.K.
risk-free rate and Rm, or market returns, ?in the U.K. this century.? 
But since they don?t say which century we should probably find some
primary sources:
Motley Fool U.K.
Glossary
http://www.fool.co.uk/school/glossary/glossary9.htm#risk-free_rate_of_return

(And note that there is a significant difference between U.S. and U.K.
government bonds: they?re tax-free in the U.K. and taxable in the
U.S.)

You could undoubtedly use the London Financial Times for bonds, but
I?ll use the Wall Street Journal quotes (http://www.wsj.com -- in the
credit markets section) for U.K. bonds, which have a very flat yield
curve:

Sept. 2006 maturity, 4.55%
Dec. 2009: 4.55%
Sept. 2015: 4.57%
Mar. 2036: 4.47%

Motley Fool is also an excellent source for analyzing the market
returns in the U.K.   This report is on a Credit-Suisse First Boston
(CSFB) study done by the investment bank of long-term market returns
for the FTSE 100 ? the Financial Times leading 100 U.K. stocks.  The
FTSE 100 is probably the most-used index for CAPM calculations, though
there is also a FTSE 250 and a FTSE 350:

Answers.com
?Wikipedia definition of FTSE 100?
http://www.answers.com/topic/ftse-100-index&method=6

You can determine your own period for FTSE 100 returns by using any of
a number of stock market sites and looking at the year-end level of
the index.  I?d recommend the excellent BigCharts.com site and use the
?historical quotes? section for the end of the year ? and uk:FTSE 100
as your symbol for the index:

BigCharts.com
?Historical Quotes?
http://bigcharts.marketwatch.com/historical/

Here are the numbers for recent years:

2004: 4,814.3
2003: 4,476.9
2002: 3,940.4
2001: 5,217.4
2000: 6,222.5

Google search strategy:
U.K. ?risk free rate? gilts
U.K. historical FTSE

Best regards,

Omnivorous-GA

Clarification of Answer by omnivorous-ga on 26 Apr 2005 09:42 PDT
Redshep --

I inadvertently dropped the link to story on the excellent CSFB study:

Motley Fool U.K.
"Guaranteed Stock Market Returns," (Paton, Oct. 31, 2001) 
http://www.fool.co.uk/news/foolseyeview/2001/fev011031c.htm

Best regards,

Omnivorous-GA

Request for Answer Clarification by redshep-ga on 27 Apr 2005 01:50 PDT
Hello Omnivorous-GA,

Many thanks for the quick response and excellent information.

Please can you clarify how I work out the return on the market from
the FTSE information? I have very little knowledge of finance and want
to know how it is worked out!  Thanks once again.
Red

(Here are the numbers for recent years:

2004: 4,814.3
2003: 4,476.9
2002: 3,940.4
2001: 5,217.4
2000: 6,222.5)

Clarification of Answer by omnivorous-ga on 27 Apr 2005 06:31 PDT
Redshep --

You might wish to take the market returns from the CSFB or Motley Fool
studies, as they're over a long period.

Alternately you can create your own averages, though I'd recommend at
least a 10-year period -- particularly since this 5-year average is
negative, something that long-term studies DO NOT support.  You'll be
doing year-to year percentages, like the following:

2004: 4,814.3 (4,814.3 - 4476.9) = 337.4 gain on 4476.9 = 7.54% 
2003: 4,476.9  +13.6%
2002: 3,940.4  -24.5%
2001: 5,217.4  -16.2%
2000: 6,222.5

Thanks for your kind comments, as I learned something in answering
this.  I was actually surprised that CAPM studies generally don't use
the broader FTSE 350.

I think that you know that in the U.S. the Standard & Poor's Index of
500 stocks is used, as it represents a high percentage of the value of
U.S. public companies.  The best-known index in the U.S. is probably
the Dow-Jones industrial averages, because of its longevity (it's
almost 100 years older than the S&P500) -- but it measures fewer
companies.  And there are broader indices, like the Wilshire 5000.

Best regards,

Omnivorous-GA
redshep-ga rated this answer:5 out of 5 stars
Many thanks for the detailed clarification and extra comments. Red

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