The CAPM relates the sensitivity of an individual company's stock returns to the returns of the market as a

whole. Estimating such a model for a particular firm requires data on the market rate of return $($typically a

composite index such as the S&P $500),$ the risk$-$free rate of return $($usually a short$-$term Treasury bill$),$ and

stock returns from the company of interest. The data for this assignment consists of monthly observations

from January $2017$ through December $2018$ on the market return $($R$\_$M$),$ the risk$-$free rate $($R$\_$F$),$ and the

return on the York Corporation's common stock $($R$\_$Y$).$

Using Excel, we create two new variables, R$\_$YORK $=$ R$\_$Y$-$R$\_$F and R$\_$MKT $=$ R$\_$M$-$R$\_$F$,$ that correspond

to the risk premiums for the YORK Corporation and the market, respectively.

$1.$ Plot the risk premium of the York Corporation's common stock $($R$\_$YORK$)$ against the risk premium of the

market $($R$\_$MKT$).$ Do you have graphical evidence that the return on the York Corporation's common stock

$($R$\_$Y$)$ and the risk premium of the market $($R$\_$MKT$)$ have a linear relationship?

$2.$ Regress the risk premium of the York Corporation's common stock $($R$\_$YORK$)$ on a constant and the risk

premium of the market $($R$\_$MKT$).$ What is the beta of the assets of the firm.

$3.$ The YORK corporation stock is mispriced if the estimate of the intercept in the regression in $2)$ is statistically

different from zero. Explain why the intercept is expected to be zero if the CAPM holds.

$4.$ The R$2$ measures the proportion of the total variation of a dependent variable Y$,$ explained by the regression

of Y on the independent variable, X$.$ What is the percentage of the variance in the excess returns on YORK

corporation due to the excess returns on the market?