1.You are trying to investigate a new trading strategy with which to possibly open a hedge fund. You sort firms on their depreciation expense as a fraction of assets. The assumption is that high depreciation reduces earnings, but isn't actually bad economic news. If investors treat this like other earnings, they might be overly pessimistic about these firms, and so high depreciation firms will do better in the future (so the hypothesis goes).

You form the portfolio of high past depreciation firms minus low past depreciation firms, and then use the portfolio returns over the last 6 years to run two regressions: one, a CAPM regression where you regress the monthly excess return of the portfolio (i.e. Rp= rp-rf where rf is the risk-free rate) on the excess returns of the market (RM= rM-rf), as well as a three factor regression where the portfolio excess returns are regressed on the excess returns of the market as well as the SMB and HML portfolios from Ken French's website. In all regressions, returns are included as decimals (so a return of 1% is written as 0.01). Results for the two regressions are presented below: