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b. An analyst is interested in testing whether liquidity risk (LIQ) is priced in addition to the market factor (Market) that is considered in CAPM.

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b. An analyst is interested in testing whether liquidity risk (LIQ) is priced in addition to the market factor (Market) that is considered in CAPM. The analyst has decided to employ the Fama-MacBeth two-stage procedure. i. Explain the first-stage of the regression analysis the analyst would employ. [6 marks] ii. What are the dependent and independent variables in the second stage of the analysis? [6 marks] iii. What would the results be in a CAPM world? [6 marks]

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