You have been given an excel spreadsheet called "Eviews Assessment Dataset- FNM221". This consists of monthly observations on financial and macroeconomic data. The sample starts in March 1986 until April 2007.

Answer ALL questions; marks for each section are noted in brackets.

Input the data in Eviews.

(1) Plot log returns (log (P_t/P_t-1) of Microsoft and Standard and Poors over the sample size. Give a brief explanation of how the stock performed over time. Compute the correlation coefficient between the market and the stock and comment.

(2) Tabulate the summary Statistics (Mean, Median, Standard Deviation, Skewness and Kurtosis) table for Microsoft and comment.

(3) One of the earlier tests of the CAPM (the Market Model) simply assumes the following relationship:

R_i = α + βR_m + u_i

Estimate this relationship, and comment on the goodness of fit.

(4) Test the hypothesis that α = 0 against the alternative that α ≠ 0

(5) Test the hypothesis that β = 0 against the alternative that β ≠ 0

(6) The Arbitrage Pricing Theory is another competitor for the CAPM. This pricing theory states that certain "factors" can influence returns. The factors which are considered include the following: Difference in log Industrial Production (also, known as change in GDP), Difference in log of Consumer Credit, BAA-AAA Spread.

First create the log of change in Industrial Production and Consumer Credit.  (similar to how you computed returns in step 1)

Estimate the APT:

R_i = α + β₁R_m + β₂X₂ + β₃X₃ + β₄X₄ + u_i

Where : X₂, X₃, X₄ are respectively the log change in industrial production, log change in consumer credit and BAA-AAA spread.  Comment on the new model, paying special attention to the goodness of fit, and the parameters.

Does the APT improve on the CAPM as a measure of predicting returns? (Hint test the joint hypothesis that β₂= β₃= β₄= 0. )