tions. P84 fen Question 7 [40 marks]: A researcher obtained monthly log returns for IBM and Monthly simple returns for the Value-Weighted index of US markets. The data covers 1926:1 to 1997:12. One version of the Capital Asset Pricing Model (CAPM) stipulates that the return of an asset is not predictable and should have no autocorrelation. /Verify this claim using nothing but the sample autocorrelations (see Exhibit A) and the LB tests (see Exhibit B)for the simple and log returns of IBM and the market index. Explain your conclusion. Now focus on the simple returns for the index (see Exhibit A). Using the sample partial autocorrelations try to come up with two tentative AR models for the returns. Justify your answer. Estimation of an AR(3) and an AR(5) (see Exhibit C). Analyze your results using the Box-Jenkins method. Be sure to pay attention to the interpretation of the parameters, in particular with regard to serial dependence of the returns. Which of these two AR representation fits best. Explain