(Data) Monthly rate of return data (in percentage points) are presented below for three stocks and...

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(Data) Monthly rate of return data (in percentage points) are presented below for three stocks and the S&P index for a 12-momth period. Month 1 2 3 4 5 6 7 8 9 10 11 12 Stock 1 12.05 15.27 -4.12 1.57 3.16 -2.79 -8.97 -1.18 1.07 12.75 7.48 -0.94 Stock 2 25.20 2.86 5.45 4.56 3.72 10.79 5.38 -2.97 1.52 10.75 3.79 1.32 Stock 3 31.67 15.82 10.58 -14.43 31.98 -0.72 -19.64 -10.00 -11.51 5.63 -4.67 7.94 S&P 12.28 5.99 2.41 4.48 4.41 4.43 -6.77 -2.11 3.46 6.16 2.47 -1.15 om We wish to estimate the necessary mean-variance analysis paran parameters based on the single-factor model r = a + Bir + e,i = 1,2,3, where r, is the rate return of asset i, M is the rate of return of the S&P index, e, are random variables which are uncorrelated with each other and , and a; and are constants. (a) Estimate the mean and variance of the S&P index. (b) Estimate the mean and variance of each stock's return. (c) Estimate a, B; and the variance of the error term (o) for each stock. (d) Comment on the goodness of fit of the single-factor model. (e) Use the factor model to estimate the covariance matrix of the three stocks. (Data) Monthly rate of return data (in percentage points) are presented below for three stocks and the S&P index for a 12-momth period. Month 1 2 3 4 5 6 7 8 9 10 11 12 Stock 1 12.05 15.27 -4.12 1.57 3.16 -2.79 -8.97 -1.18 1.07 12.75 7.48 -0.94 Stock 2 25.20 2.86 5.45 4.56 3.72 10.79 5.38 -2.97 1.52 10.75 3.79 1.32 Stock 3 31.67 15.82 10.58 -14.43 31.98 -0.72 -19.64 -10.00 -11.51 5.63 -4.67 7.94 S&P 12.28 5.99 2.41 4.48 4.41 4.43 -6.77 -2.11 3.46 6.16 2.47 -1.15 om We wish to estimate the necessary mean-variance analysis paran parameters based on the single-factor model r = a + Bir + e,i = 1,2,3, where r, is the rate return of asset i, M is the rate of return of the S&P index, e, are random variables which are uncorrelated with each other and , and a; and are constants. (a) Estimate the mean and variance of the S&P index. (b) Estimate the mean and variance of each stock's return. (c) Estimate a, B; and the variance of the error term (o) for each stock. (d) Comment on the goodness of fit of the single-factor model. (e) Use the factor model to estimate the covariance matrix of the three stocks.

Answer rating: 100% (QA)

Certainly Based on the given monthly rate of return data for the SP index and three stocks we can calculate the mean and variance for each asset Here ... View the full answer