Reference no: EM132550281

Question 1: Suppose you have daily data on the prices of 100 stocks traded in Karachi Stock Market and Market Index for 1000 days. Data on interest on Treasury bill is also given for the same period. In the context of CAPM, answer following questions:

i) Distinguish between Market Risk and Internal Risk?
ii) How will you compute market risk? How will you interpret it?
iii) Specify a model to accecs the impact of market risk on mean returns of the assets?
iv) How will you model the impact of market risk and internal risk on the mean return of stocks?

Question 2: Consider following Markov Regime Switching Model

where is exchange rate, is intercept and regime dependent. We have two states, that is, s = 1 if exchange rate appreciates and s = 2 if exchange depreciates. Using quarterly data for France a researcher finds following results

for regime I where exchange rate appreciates,

for regime 2 where exchange rate depreciates. The transition probabilities are and expected durations are Interpret above results.

Question 3: (I) Are following stochastic process stationary? No-stationary? Integrated? Non-integrated? Explain your answer

a   b   c

where is white noise

(II) Consider Random Walk Without Drift and Trend Model where is white noise. Show that this is a Pure Trend Model.