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We test the CAPM for this coursework; you will use one market index and a list of 10 companies’ weekly da…….

We test the CAPM for this coursework; you will use one market index and a list of 10 companies’ weekly data and these companies should be from at least two sectors. Consider three sample periods: (1) Jan 2006 – Dec 2008, (2) Jan 2009 – Dec 2011 and (3) Jan 2012 – Dec 2014. The required data can be downloaded from Yahoo finance: http://uk.finance.yahoo.com/

Tasks:

  • Make sure that your choice of companies and sectors would capture high market capitalisation.
  • Using data for the entire sample period, run time-series regression on each of the selected companies onto a constant and market excess return and verify whether there exists a significant beta.
  • Report the t-static for alpha and the R^2 for each company.
  • Do a cross-sectional regression: for all i = 10.
  • Discuss your results and merits and demerits of CAPM analysis.
  • Discuss whether your results are sensitive to sector characteristics.
  • Word limit: 1500

Brief notes:

  1. Why use simple regression to estimate β? Here dependent variable is stock return of individual firms (yi) and independent variable is market return (xi).

Because βi=σim/(σm^2)=Covariance (market return(xi), individual stock return(yi))/variance of market return (xi)

In simple regression,

So the coefficient is actually βi=σim/(σm^2)

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