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Subject related: Finance - APPLIED QUANTITATIVE FINANCE 1. Consider the Capital Asset Pricing Model that relates the excess return of a security to the market

Subject related: Finance - APPLIED QUANTITATIVE FINANCE

1. Consider the Capital Asset Pricing Model that relates the excess return of a security to the market portfolio. The relevant data set (CAPM.xls) contains prices of different US stocks, S&P 500 index and the series of the US Treasury bills.

Link for the data set file is: https://drive.google.com/open?id=1_wN1rICTAGkdr2FWV4HDdmo_jqJZi0cT

a) Estimate CAPM betas for each of the stock given in the data set.

b) Examine the sizes and signs of the parameters in the regressions. Do these results make sense?

c) Could you explain the stocks that you would classify as defensive or aggressive stocks?

d)Do you believe that the CAPM provides some reasonable explanation of the variability of the returns to each of the given stock?

e) Do you think the CAMP model for FORD suffers from heteroscedasticity. Could you use formal test to check that?

f) Is it possible to use the standard errors in this regression if residuals are heteroscedastic?

g) For the model estimated in part e) formally test if the residuals are correlated?

h) How would you solve the problem of autocorrelation?

i) Suppose you want to regress GE log returns on FORD and S&P log returns. Would you expect to have multi-collinearity?

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