QUESTION:

The capital pricing model can be written as: R=0+1m+u Where:

R = the excess return of an asset; 1 = the coefficient of excess market return which measures assets beta; m = excess market return; 0 = measure of efficiency, u is the idiosyncratic error term. Table 1 below shows the excess monthly return of certain stock and the corresponding excess monthly market return between February 2009 and January 2010. Use the data to answer the following questions:

Table 1

Date	Excess asset return	Excess market return
January 2010	-3.5	1.0
December 2009	1.5	2.0
November 2009	5.1	7.0
October 2009	-1.5	3.0
September 2009	2.4	2.0
August 2009	2.6	10.0
July 2009	6.3	14.0
June 2009	-0.1	10.0
May 2009	4.8	12.0
April 2009	8.9	6.0
March 2009	7.1	4.0
February 2009	-9.8	15.0

Required:

1. What kind of data structure is presented in Table 1? (Explain your choice) [2 Marks]
2. Use the Ordinary Least Squares method to estimate 0 and 1 [6 Marks]
3. Write the fitted regression model and interpret it [3 Marks]
4. Estimate the coefficient of determination in the dataset and interpret it [5 Marks]
5. Discuss the practical meaning of the estimated values in 3 above in terms of risk and efficiency of the assets. [4 Marks]