Go to Ken Frenchs Data Library and download the monthly returns of the Fama-French 3 factors. Cut the sample so that it begins on April 1986. Complement this data by downloading, either through Yahoo Finance or any alternative provider, the monthly adjusted close prices for Apple (AAPL), Microsoft (MSFT), and Coca-Cola (KO).

Answer only question 5 and 6 in the following questions:

1. Construct the time series of the returns for each of the 3 companies AAPL, MSFT and KO

2. Construct the innovations (that is, first differences) in factor returns, for each of the 3 factors.

3. Suppose our hypothesis is that the only systematic risk that should be priced is the MKTRF factor. Use the data to verify whether this hypothesis is consistent with the evidence.

4. If you concluded that the 1-factor model is reasonable, then you are done. Otherwise, hypothesize that we live in a 2-factor world, where, alongside the MKTRF factor, returns are also predicted by exposure to size (captured by SMB). Use the data to verify whether this hypothesis is consistent with the evidence, and compare it with the earlier results.

5. If you concluded that the 2-factor model is reasonable, then you are done. Otherwise, hypothesize that we live in a 3-factor world, where, alongside the MKTRF and SMB factors, returns are also predicted by exposure to value (captured by HML). Use the data to verify whether this hypothesis is consistent with the evidence, and compare it with the earlier results.

6. Suppose now that we live in a 3-factor world, in which we must track KO. Use the data (if needed, download additional data from the usual sources), to achieve this objective, specifying the weights of the tracking portfolio.