Project Part - Asset pricing models

In project part 4, you will run regressions on the CAPM and Fama/French 3 factor models. See the lecture on Estimating the CAPM and FF3FM for further hints. You will also plot the SML.

Calculate a table with relevant statistics related to the CAPM.

Create a table called "Table 6: The Capital Asset Pricing Model" that reports the following statistics for your securities and your portfolio allocation from part 2, P0. To accomplish this, you will need to run 12 regressions in excel and extract the necessary statistics. Use the "Mkt-RF" data from the Fama/French data provided as your market risk premium factor (i.e. this is your "x" variable. The "y" variable is you security return).

Alpha - α - coefficient for the intercept
s.e.(α) - standard error of the intercept
t-stat (α) - t-stat for the intercept
p-value (α) - p-value for the t-stat of the intercept
Beta - β - coefficient for the market risk premium
σ(ε) - standard error of the residual (this is called "standard error" in the regression statistics)
R² - the R Square of the regression

(Note: to create a time series for P0, you need to multiple each of the returns on your securities by the appropriate weights based on your chosen allocations. You will do this row-by-row, for 60 rows.)

Create a figure that plots the SML and each of your securities along the SML.

First, plot the SML. Find the average of Mkt (add back the RF). This is the value along the vertical axis. The value along the horizontal axis is the is the Beta, for the market, this is = 1. Find the average of RF (it is very small), and its beta is = 0. Plot a line through these two points. That is the SML. Next, plot all of your securities and your P0 on the same graph as the SML. You will use the returns from part 3 and the Betas from table 6, from part 4. Try to make everything fit nicely on one graph.

Calculate a table with relevant statistics related to the FF3FM.

Create a table called "Table 7: The Fama/French 3 Factor Model" that reports the following statistics for your securities and for your portfolio allocation from part 2, P0. To accomplish this, you will need to run 12 regressions in excel and extract the necessary statistics.

Alpha - α - coefficient for the intercept
p-value (α) - p-value for the t-stat of the intercept
Mkt-RF - coefficient for the market risk premium
SMB - coefficient for the SMB Factor
HML - coefficient for the HML Factor
σ(ε) - standard error of the residual (this is called "standard error" in the regression statistics)
R² - the R Square of the regression

Observe the differences between the market risk premium factors in tables 6 and 7 and also what may have happened to the statistical significance of the alphas.

Attachment:- portfolio theory.rar