Description

CAPM, Fama-French, and APT

Note: All of your regressions should be run on the most recent 60 months of data, but the time period may vary depending on when particular data series are available. You should gather all of the data before you run any regressions. Need all regressions and data in excel file. 

CAPM (2 regressions: 1 for stock, 1 for mutual fund) 

Go to finance.yahoo.com and download the historical monthly level of the S&P.  Enter these in a worksheet and then calculate the monthly returns for the index. Now download the monthly adjusted prices for a stock and a domestic actively managed equity mutual fund. Enter these adjusted close prices and returns in the same worksheet and calculate the monthly returns for the each series. Now go to www.stls.frb.org and find the data for “3-Month Treasury Constant Maturity Rate.” This is the risk-free rate for this particular analysis. Note, the interest rate is expressed as an APR in this data. Estimate the market model for the stock and mutual fund and answer the following questions:

1. What is the beta and alpha for this stock?

2. Are the beta and alpha significant at the 5 percent level?

3. What is the R2 of this regression? In your opinion, does this regression explain the returns for 

    your stock?

FAMA-FRENCH ( 2 regressions: stock and mutual fund) 

You want to construct a Fama-French model to explain your stock’s returns. Use the same stock and mutual fund and the same period you used to construct the CAPM. The variables in the Fama-French Model are: (NOTE: Use monthly data in your analysis.)

The Fama-French factors can be downloaded in the data section of Ken French’s website:

http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/index.html

Construction: The Fama/French factors are constructed using the 6 value-weight portfolios formed on size and book-to-market. (See the description of the 6 size/book-to-market portfolios.) 

  SMB (Small Minus Big) is the average return on the three small portfolios minus the average return on the three big portfolios, 

  SMB = 1/3 (Small Value + Small Neutral + Small Growth)

 - 1/3 (Big Value + Big Neutral + Big Growth).  

  HML (High Minus Low) is the average return on the two value portfolios minus the average return on the two growth portfolios, 

  HML = 1/2 (Small Value + Big Value)

 - 1/2 (Small Growth + Big Growth).  

  Rm-Rf, the excess return on the market, is the value-weight return on all NYSE, AMEX, and NASDAQ stocks (from CRSP) minus the one-month Treasury bill rate (from Ibbotson Associates).

  See Fama and French, 1993, "Common Risk Factors in the Returns on Stocks and Bonds," Journal of Financial Economics, for a complete description of the factor returns.

Stocks: Rm-Rf includes all NYSE, AMEX, and NASDAQ firms. SMB and HML for July of year t to June of t+1 include all NYSE, AMEX, and NASDAQ stocks for which we have market equity data for December of t-1 and June of t, and (positive) book equity data for t-1.

1. What are the betas and alphas for the stock and mutual fund?

2. Are the betas and alphas significant at the 5 percent level?

3. What is the R2 of these regressions? In your opinion, does this regression explain the returns? 

Fama-French and APT (3 regressions: stock, mutual fund, ST, and 5th variable) 

Estimate a regression for the stock and mutual fund using the Fama-French factors plus the following variables:

ST = the percentage change in consumer sentiment. Recently, a branch of finance called behavioral finance has emerged that argues that investor sentiment drives markets. On www.stls.frb.org, go to the Business/Cyclical link and find “University of Michigan: Consumer Sentiment.” You need to construct this variable as the percentage change in the index. 

The 5th variable – YOURS

Find a fifth variable for your APT model. Explain why you chose this variable, i.e., what are the economic reasons this variable should affect the returns of your stock. The variable could possibly be an industry specific variable. For example, you could use the book-to-bill ratio for the computer industry. One place to find the variable is www.stls.frb.org, but you can use any appropriate variable you find. NOTE: This variable cannot be the stock market, another stock, or any stock index.

1. What are the betas and alphas for the stock and mutual fund?

2. Are the betas and alphas significant at the 5 percent level?

3. What is the R2 of these regressions? In your opinion, does this regression explain the returns? 

Instruction Files