Question: You test the CAPM for this assignment; you will use 25 companies weekly data and these companies should be from at least three sectors of
You test the CAPM for this assignment; you will use 25 companies weekly data and these companies should be from at least three sectors of the constituent stocks in Hang Seng Index. Consider two sample periods: (1) Jan 2005 Dec 2007 and (2) Jan 2009 Dec 2019. The required stock data can be downloaded from Yahoo finance: http://hk.finance.yahoo.com/. You should also use Hang Seng Index and Exchange Fund Bill to proxy expected market return and risk-free return respectively. Make sure that your choice of companies and sectors would capture high market capitalisation.
Tasks:
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Using data for the entire sample period, estimate the following equation for each of the 25 selected companies:
ri - rf = ai + bi (rm - rf) i = 1, 2...........25
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For each company, report the R2 and the 95% confidence intervals for ai and bi. Interpret your results.
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Next, using the 25 bi estimated above, estimate the following equation:
ri - rf = 0 +1 bi where ri - rf = average risk premium of stock i
If the CAPM is correct, then0 and1 should satisfy: 0 = 0 and 1 = rm - rf
where rm - rf = average market risk premium
Use 95% confidence interval to determine whether 0 = 0 and 1 = rm - rf
Also report the R2 and interpret it.
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