The capital asset pricing model (CAPM) postulates that the mean return of each security (Y) should...

 

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The capital asset pricing model (CAPM) postulates that the mean return of each security (Y) should be linearly related to its Beta (X2), a measure of systematic risk. We examine this hypothesis by regressing Y on X2 using the following information on six stocks: Stocks Mean Return % 1. 2. Beta (X2) (Y) A 20 1.5 B 05 1.1 C 15 1.3 D 15 1.5 Say, we construct a theoretical model for mean stock return as: YB1+B2X2i + Ui Discuss the expected sign of a slope parameter. Why do we include stochastic error term (u) in our econometric model? For a sample regression function, show that the variance of a slope estimator (b2) is equal to . Compute and interpret the least square estimates of , and 2. 3. 4. Test the hypothesis that Beta (X2) is a significant variable. [Hint: ttab 4.3] 5. Construct and interpret a 95% confidence interval for 2. [Hint: ttab 4.3] The capital asset pricing model (CAPM) postulates that the mean return of each security (Y) should be linearly related to its Beta (X2), a measure of systematic risk. We examine this hypothesis by regressing Y on X2 using the following information on six stocks: Stocks Mean Return % 1. 2. Beta (X2) (Y) A 20 1.5 B 05 1.1 C 15 1.3 D 15 1.5 Say, we construct a theoretical model for mean stock return as: YB1+B2X2i + Ui Discuss the expected sign of a slope parameter. Why do we include stochastic error term (u) in our econometric model? For a sample regression function, show that the variance of a slope estimator (b2) is equal to . Compute and interpret the least square estimates of , and 2. 3. 4. Test the hypothesis that Beta (X2) is a significant variable. [Hint: ttab 4.3] 5. Construct and interpret a 95% confidence interval for 2. [Hint: ttab 4.3]