Regardless of your answer to Problem 6, assume for now that the residuals are uncorrelated. Then use the CAPM to estimate the covariance matrix of the excess returns on the four stocks. Compare this estimate with the sample covariance matrix of the excess returns. Do you see any large discrepancies between the two estimates of the covariance matrix?
Next, you will fit the Fama-French three-factor model. Run the following
R code, which is much like the previous code except that the regression model has two additional predictor variables, SMB and HML.
fit2 = lm(as.matrix(stocks_diff)~FF_data$Mkt.RF +
FF_data$SMB + FF_data$HML)
summary(fit2)