This is a project in R studio

Part 3: CAPM The CAPM (Capital Asset Pricing Model) model can be expressed as RiRf=1(RmRf) where Ri is the return on investment i , Rf are risk-free interest, Rm is the market return and i is the beta of the investment, i.e. the ratio between the excess return (i.e. excess of the risk-free rate) of the relevant investment (RiRf) and the market (RmRf) . Read about the CAPM model to learn more.

a) In the model, there is a linear relationship between excess returns on investment and markets without constants. Estimate the relationship of the excess return of consumer durables (durblrf) OR the construction sector (cnstrrf) to the market portfolio both with and without fixed 0 . Assess whether it is reasonable to include the constant in the model and give an argument for the choice taking into account the significance of the constant and explanatory power for the two models.

b) Plot the residuals of the model from part a (with or without a constant, whichever is more natural to use) as a function of the explanatory variable. Infer the quality of the model from the image.

Part 5: The three-factor CAPM Fama and French improved the explanatory power of the CAPM with more explanatory variables (RiRf)=i+1(RmRf)+2SMB+3HML+i Read about the meaning of the model and the variables that have been added. Add the variables SMB and HML to the model from part 1. First, state why the coefficient on the excess spread (1 ) has changed from the value it took in step 1. Next, report whether the two added variables improved the model. Present appropriate tests and interpret appropriate quantities. Solution: