Stock prices

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Download “stocks.xlsx.” You will find 3 stock prices (labeled “market, A, B”) and 3 factors (labeled “riskfree, smb, hml”) in the range of 2011:M12 to 2021:M2.

  1. (20pts) Let the log return for stock i be ri,t at time t. Provide the sample mean and standard deviation for rm,t,rA,t,rs,t where 2012:M1 < t < 2021:M2. For convenience, “M” refers to “market.”
  2. (20pts) Estimate the CAPM equation and report the estimated /3 and R2 from the regression. Here the estimation sample ranges from 2012:M1 to 2021:M2. Note that you are estimating the CAPM equation for A and B stocks separately (so, twice in total).
  3. Similarly estimate the Fama-French 3 factor model for A and B stocks. Here the estimation sample ranges from 2012:M1 to 2021:M2.
    (a) (20pts) Compare the estimates of fi with those from the CAPM equation. (b) (20pts) Based on the coefficient estimates for “smb” and “hml” factors, discuss the characteristics of A and B stocks.

Sample Solution

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