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Question 4 Consider a FarnaMacBeth regression for investigating which factors are important in generating excess returns. In the rst stage, the excess returns for a portfolio are regressed against excess market returns, a factor for size of portfolio and a factor for the value of portfolio. In the second stage the effect of the estimated market beta, size factor and value thetorsareregressed against themeanexcessretumforthepmrtfolio.1hetwo stagesare represented as belowr Rm Rm = or + it,\" R\") +5 x .Sa'tzzet + h x Virtue.-It + st RIM4t\"=A\