For this problem, you will need data in Excel file homework3 data 1.xlsx available on Blackboard, which contains monthly returns on Microsoft, IBM, Oracle stocks and the aggregate stock market index. You do not know if CAPM holds. a) (2 points) Compute expected returns (means) on Microsoft, IBM, Oracle stocks and the aggregate stock market index. b) (2 points) Compute betas of Microsoft, IBM, Oracle stocks and the aggregate stock market index. c) (1 points) One of the implications of CAPM is that stocks which have higher :s should also have higher expected returns. To see this, note that CAPM implies that R A = RF + A(R M Rf ) and R B = RF + B(R M Rf ). Subtracting the second equation from the first one yields: R A R B = RF +A(R M Rf )RF B(R M Rf ) = (A B)(R M RF ). Thus, as (R M RF ) is positive (nobody would hold the risky market portfolio, if it would on average pay less than the riskless asset), if (A B) > 0, R A R B should also be positive. 2 Consequently, one way to test CAPM in data is to check if stocks which have higher :s also have higher expected returns. Given your results from a) and b), is this implication of CAPM true in the sample of Microsoft, IBM, Oracle, and the aggregate stock market index?