Consider the following estimated equation of a CAPM model for IBM securities over the past

60 monchs:

(Ribm = Rebuts) = 0.0093 + 0.6756 (Rnyse - Rebill)

Std. Errors

(0.0054) (0.1348)

n=60 R-squared = 0.3022

Where: - (Ribm - Rebills) and (Rnyse - Rebills), are IBM risk premium and market risk premium

respectively;

• Ribm and Rnyse, are respectively IBM and NYSE monthly returns;
• Rchills the return on the treasury bills.

a.

Provide an interpretation for each of the regression coefficient estimates. (2pts)

1. What is the predicted IBM return, if the market return is 3.2% and the risk-free return is 0.4%? (1pt).
2. Provide a 95% interval estimate for the slope and intercept coefficients. (2pts)
3. With a 5% significance level, how do you determine whether movements in the market risk premium have a significant positive impact on IBM risk premium? (state clearly what are the relevant null and alternative hypothesis, and explain what are the implications from your test conclusion). (2pts)

According to the Capital Asset pricing Model, assets having risk premia that fluctuate less than one-for-one with the market are called defensive assets, and those whose risk premia fluctuate more than one-for-one with the market are called aggressive assets.

1. Considering the coefficient estimates provided above, state whether IBM can best be described as aggressive, neutral, or defensive security. Test the significance of your statement with a 5% significance level. (2pts)
2. From the estimated equation above, what proportion of the variability of IBM premium can be attributable to systematic risk? to specific risk?