The following annual excess rates of return (%) were obtained for nine individual stocks and a market index:

3. Perform the first-pass regressions and tabulate the summary statistics.

4. Specify the hypotheses for a test of the second-pass regression for the SML.

5. Perform the second-pass SML regression by regressing the average excess return of each portfolio on its beta.

6. Summarize your test results and compare them to the reported results in the text.

7. Group the nine stocks into three portfolios, maximizing the dispersion of the betas of the three

   resultant portfolios. Repeat the test and explain any changes in the results.

8. Explain Rolls critique as it applies to the tests performed in problems 3 to 7.

9. Plot the capital market line (CML), the nine stocks, and the three portfolios on a graph of average returns versus standard deviation. Compare the mean-variance efficiency of the three portfolios and the market index. Does the comparison support the CAPM?

Stocks E Year Market Index A B D F G H 1 29.65 33.88 -25.20 36.48 42.89 -39.89 39.67 74.57 40.22 90.19 - 11.91 N 3 14.73 4 27.68 5 5.18 CO 25.97 7 10.64 -49.87 24.70 -25.11 -54.39 44.92 -54.33 -79.76 -71.58 -26.64 65.14 -25.04 18.91 -39.86 -3.91 -5.69 26.73 14.49 18.14 14.46 -38.64 -23.31 -.72 -3.21 92.39 -3.82 13.74 .09 15.67 61.93 63.95 -32.82 44.26 -42.96 101.67 24.24 8.98 -32.17 44.94 -19.56 69.42 90.43 76.72 1.72 77.22 72.38 -31.55 - 74.65 50.18 74.52 15.38 21.95 -43.95 -13.40 28.95 -23.79 47.02 -42.28 28.61 -17.64 28.83 98.01 28.12 39.41 -4.59 28.69 -.54 2.32 42.36 18.93 -2.45 37.65 94.67 -8.03 48.61 23.65 26.26 -3.65 23.31 15.36 80.59 52.51 78.22 -85.02 -.79 - 68.70 -85.71 -45.64 2.27 -72.47 -80.26 4.75 42.95 -48.60 26.27 13.24 -34.34 -54.47 -1.50 -24.46 8 1.02 18.82 9 10 23.92 11 -41.61 12 -6.64 Stocks E Year Market Index A B D F G H 1 29.65 33.88 -25.20 36.48 42.89 -39.89 39.67 74.57 40.22 90.19 - 11.91 N 3 14.73 4 27.68 5 5.18 CO 25.97 7 10.64 -49.87 24.70 -25.11 -54.39 44.92 -54.33 -79.76 -71.58 -26.64 65.14 -25.04 18.91 -39.86 -3.91 -5.69 26.73 14.49 18.14 14.46 -38.64 -23.31 -.72 -3.21 92.39 -3.82 13.74 .09 15.67 61.93 63.95 -32.82 44.26 -42.96 101.67 24.24 8.98 -32.17 44.94 -19.56 69.42 90.43 76.72 1.72 77.22 72.38 -31.55 - 74.65 50.18 74.52 15.38 21.95 -43.95 -13.40 28.95 -23.79 47.02 -42.28 28.61 -17.64 28.83 98.01 28.12 39.41 -4.59 28.69 -.54 2.32 42.36 18.93 -2.45 37.65 94.67 -8.03 48.61 23.65 26.26 -3.65 23.31 15.36 80.59 52.51 78.22 -85.02 -.79 - 68.70 -85.71 -45.64 2.27 -72.47 -80.26 4.75 42.95 -48.60 26.27 13.24 -34.34 -54.47 -1.50 -24.46 8 1.02 18.82 9 10 23.92 11 -41.61 12 -6.64