Question
FINC6610 Capital Market Theory Homework on SIM and Multi-Index Model Instructions: This homework is about testing the contribution of multi-index model over the single index
FINC6610 Capital Market Theory
Homework on SIM and Multi-Index Model
Instructions: This homework is about testing the contribution of multi-index model over the single index model. You have to gather stock returns data and run regression and test hypothesis.
Where RRSS = residual (error) sum of squares under the SIM
URSS = residual (error) sum of squares under 3-factor model
N = number of observations
K = number of explanatory variables in 3-factor model (=4) including constant.
M = different in number of explanatory variables between SIM and 3-factor model
Critical F can be obtained from F tables at (m, N-k) degrees of freedom. Test if the F-stat is significant at 5% level of significance.
For how many of the 10 stocks is F-stat significant?
Write concluding statements about whether 3-factor model is better than SIM in explaining stock returns. Organize your work properly including results tables.
Save the following for next homework: average returns for each stock, the market index and risk-free rate; beta of each stock; variance of the market index, and standard deviation of residuals of each stock from SIM regressions.
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