Present the capital asset pricing model

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Reference no: EM133542628

Empirical Finance

Download the file coursework_dataset.dta,

Data have been collected from Yahoo Finance. They range from January 1990 to November 2020 with a monthly frequency.

In Column 1, we report the "date". In Column 2, the variable "r_market", is the return of the market portfolio. In Column 3, the variable "rfr" is the monthly return for the Treasury bills, the risk free asset. In Column 4, "hml" is the average return of the stocks in the high market-to-book portfolio minus the return of the stocks in the low market-to-book portfolio. In Column 5, "smb" is the average return of stocks in a portfolio formed by small market capitalization companies minus the average returns of stocks in the portfolio formed by big market capitalisation companies (see Figure 1). Data have been collected from the Kenneth French's Data Library website and the full description of

the above variables is available at the following link.
From Column 6 onward, you find the price for about 240 stocks listed in the S&P500.

Choose any one asset.

Answer the following questions

Question 1: Present the Capital Asset Pricing Model (CAPM). Discuss how the model is made operational when it comes to estimating it using the data.

Question 2: Estimate the simple CAPM model. Report and discuss the results and whether you believe the estimate you have obtained is appropriate. Test the hypothesis that the asset is in equilibrium. Discuss the testing procedure, report the result of the test, and discuss the decision you take.

Question 3: Present and discuss the Fama and French (1993) three factors model. Estimate it using the data and discuss the results. Compare the results with those from the model under question (b). What is the preferred model, and why?

Question 4: Discuss the relationship, if any, among the models you have estimated in point b. and d. and the single and the multiple index models.

Reference no: EM133542628

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