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Business Statistics
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Calculate the descriptive statistics of the selected industry portfolio and the market portfolio. What do you observe?

INSTRUCTIONS TO CANDIDATES
ANSWER ALL QUESTIONS

Instructions: This coursework assignment (research report) must be submitted electronically via FASER by the due date and time. When submitting your coursework assignment you must provide one Microsoft Word or PDF file containing your written/text answers to the questions. In your answers to the questions below, you should present your Eviews equation estimation output as it would be in published academic papers. (Examine several such papers, the approaches to presentation are fairly standard.) Raw Eviews output should be included only in an Appendix.  

 

The report should not exceed 2000 words in length. It should have a clear introduction and a conclusion.  You should ensure that you have fully acknowledged the work of others in the body of the text and include a full list of references for all articles, books and other sources (e.g. Internet sites) that have been cited in the assignment. Coursework will be processed with plagiarism detection software. Marks will also be given for the presentation of your work. 

 

The data required for the coursework is contained in the excel file `DataSet’ in the coursework section on Moodle. The tab ‘factors’ contains monthly factor data of the US stock market from July 1963 to September 2022 that we will use to estimate three standard asset pricing models: the classical CAPM, the Carhart 4-factor model and the Fama-French five-factor model. The variables in the Excel file are: `RF' containing the risk-free rate, `MktRF' containing the excess return on the market portfolio (the single factor in the classical CAPM model), `SMB' containing the small-minus-big factor from the FF 5-factor model, `HML' containing the high-minus-low factor from the FF 5-factor model, ‘RMW’ contains the robust minus weak factor from the FF 5-factor model, ‘CMA’ contains the conservative minus aggressive factor from the FF 5-factor model and `UMD' containing the Carhart momentum factor. The tab ‘Portfolios’ contain the returns for specific industry portfolios. For your analysis, you will select the appropriate portfolio according to your username’s last digit. For instance, if your username is ca17961 you should select the Durbl portfolio.

Question 1 (10 points) 

Calculate the descriptive statistics of the selected industry portfolio and the market portfolio. What do you observe? 

Question 2 (15points) 

Using your portfolio returns, estimate the CAPM. Comment in detail on your regression output, significance, and interpret the estimates. In addition to the standard output results, test the Null hypothesis that the slope coefficient is equal to 1 against the two-sided alternative. 

Question 3 (15 points)

List the potential problems associated with the OLS estimation. Test for such issues on the model estimated in question 2, and if necessary, apply the appropriate corrections.

Question 4 (15 points) 

Estimate the Carhart 4-factor model using OLS in Eviews. Comment in detail on your regression output and significance and interpret the results. How do your results compare to the model estimated in Question 2? 

Question 5 (15 points) 

Considering the models estimated in questions 2 and 4, test whether the slopes of the additional variables are jointly significant?  Was such result expected?

Question 6 (10points)

Estimate the extended 5-factor FF model. Comment in detail on your regression output, significance and interpret the results. How do your results compare to the models estimated in Question 2 and 4? 

Question 7 (10 points)

Is it possible to estimate non-linear relationships with OLS? Motivate your answer.

Question 8 (10 points)

What is the linear probability model? When do we use it and what are its limitations?  How can we overcome its limitations? 

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