Answer 2 questions,data in lab 2 folder and check lab2,3,4 as reference
use stata
Question 1
The dataset ukstock.dta (available on your moodle page) contains monthly stock prices on 85 UK companies over the period of January 1985. – December 2006. Choose any three individual stocks from these 85 companies. Then, using the FTSE100 index as a proxy for the market portfolio and 3month Treasury Bill for the risk-free rate, perform the following tests of the Sharpe-Lintner Capital Asset Pricing Model:
(a.) For a 10 year monthly period January 1985 to December 1994, regress excess return on each stock on the excess market return and perform tests with a size of 5% that the intercept is zero. Report all the estimates, t-statistics, and whether you reject the CAPM.
[10%]
(b.) Repeat the same procedure for each stock for the full sample period Jan 1985. – Dec. 2006. Report the estimates, t-statistics and whether you reject the CAPM in the full sample.
[10%]
(c.) Combine all three stocks into a single equal-weighted portfolio and re-do the tests for the full sample and for the sub-sample. Report the estimates, t-statistics and whether you reject the CAPM for both the sample periods.
[20%]
NOTE: You should indicate which three stocks you are choosing. Specify the entity name. Report the regression equation and tabulate all the regression results.
Question 2
Use the same UK Stocks dataset to answer this question. You are encouraged to go through the material in Lab 3 to answer this question.
Define initial portfolio formation period as 1985-1989 (60 months), portfolio estimation period as 1990-1994 (60 months) and portfolio testing period as 1995-1999 (60 months), respectively.
(a.) Following the Fama-Macbeth (1972) procedure (detailed in Lab3, section 3), construct 20 portfolios for the period 1995-2005. Plot estimated betas and standard deviations of first, tenth and twentieth portfolio. Intepret these graphs. [20%]
(b.) Estimate the Security Characteristic Line on this constructed portfolios and test for the validity of CAPM using the Least Square approach (LS). Report all estimates, statistics and whether you reject CAPM in the data. [20%]
(c.) Test for the validity of CAPM using the SURE approach. Report all estimates, statistics and whether you reject CAPM in the data.
[20%]
