PART 2 (65 marks) Estimate the CAPM for your stock. The formula for the CAPM is: r; = Typ +b; ('m rep) You will use STATA to estimate the CAPM. First you need to rearrange the equation by subtracting the risk-free rate from both sides and allow for an intercept which we call alpha (a) giving the empirical version of the CAPM: r; rrp = a; + b}(Im ref) In order to estimate this regression, you first need to construct the variables. You create the y-variable (also known as the dependent variable) by subtracting the risk-free rate (the Treasury Bill yield) from the returns of your stock and you create the x-variable (the independent variable) by subtracting the risk-free rate from the return on the market (the S&P 500). The regression tool will enable you to estimate the values of alpha (the intercept) and the beta (the slope coefficient). Record the essential information from the regression in Table 3. Table 3 Your stock Intercept (a) coefficient Intercept standard error Slope (b) coefficient Slope standard error R? 0.5502 n (sample size) 32 [12 marks] Conduct hypotheses tests at a 5% significance level on the intercept and slope coefficient to see if the intercept is significantly different from zero and the slope coefficient is significantly different from one (Hint: Be sure to clearly present the null and alternative hypotheses, the test statistic, critical values and clearly state your reasoning). (max 250 words) [35 marks] Interpret the intercept and slope coefficients - what are they telling us? (max 150 words) PART 2 (65 marks) Estimate the CAPM for your stock. The formula for the CAPM is: r; = Typ +b; ('m rep) You will use STATA to estimate the CAPM. First you need to rearrange the equation by subtracting the risk-free rate from both sides and allow for an intercept which we call alpha (a) giving the empirical version of the CAPM: r; rrp = a; + b}(Im ref) In order to estimate this regression, you first need to construct the variables. You create the y-variable (also known as the dependent variable) by subtracting the risk-free rate (the Treasury Bill yield) from the returns of your stock and you create the x-variable (the independent variable) by subtracting the risk-free rate from the return on the market (the S&P 500). The regression tool will enable you to estimate the values of alpha (the intercept) and the beta (the slope coefficient). Record the essential information from the regression in Table 3. Table 3 Your stock Intercept (a) coefficient Intercept standard error Slope (b) coefficient Slope standard error R? 0.5502 n (sample size) 32 [12 marks] Conduct hypotheses tests at a 5% significance level on the intercept and slope coefficient to see if the intercept is significantly different from zero and the slope coefficient is significantly different from one (Hint: Be sure to clearly present the null and alternative hypotheses, the test statistic, critical values and clearly state your reasoning). (max 250 words) [35 marks] Interpret the intercept and slope coefficients - what are they telling us? (max 150 words)