Problem 2 [12 points] Use the spreadsheet Diversification Examples (Data tab) under Course Materials. In this...

Transcribed Image Text:

Problem 2 [12 points] Use the spreadsheet "Diversification Examples" ("Data" tab) under Course Materials. In this question, you will test whether the CAPM holds for 4 of the countries in the MSCI World Index: Germany, Japan, UK, and USA. (a) [5 points for correct estimation] Estimate the CAPM regression for Germany using all available data from January 1993 to June 2018. The regression you should run is Rit Rb,t = ; + i(Rm,t - Rb,t) + i,t where Ri,t is the return on Germany, Rm,t is the market return (i.e., MSCI World Index), and Rb,t is the riskless rate. Repeat for the remaining 3 countries. (b) [2 points] Which country is the riskiest (i.e., most systematic risk)? (c) [2 points] Which country is the safest (i.e., least systematic risk)? (d) [3 points] Can you reject the CAPM at the 95% significance level? Which countries have statistically significant alpha? Problem 2 [12 points] Use the spreadsheet "Diversification Examples" ("Data" tab) under Course Materials. In this question, you will test whether the CAPM holds for 4 of the countries in the MSCI World Index: Germany, Japan, UK, and USA. (a) [5 points for correct estimation] Estimate the CAPM regression for Germany using all available data from January 1993 to June 2018. The regression you should run is Rit Rb,t = ; + i(Rm,t - Rb,t) + i,t where Ri,t is the return on Germany, Rm,t is the market return (i.e., MSCI World Index), and Rb,t is the riskless rate. Repeat for the remaining 3 countries. (b) [2 points] Which country is the riskiest (i.e., most systematic risk)? (c) [2 points] Which country is the safest (i.e., least systematic risk)? (d) [3 points] Can you reject the CAPM at the 95% significance level? Which countries have statistically significant alpha?