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.

(Q1)Using data for the entire sample period, estimate the following equation for each of the 25 selected companies:

r_i -r_f = a_i + b_i (r_m -r_f)i = 1, 2...........25

(Q2)For each company, report the R² and the 95% confidence intervals for a_i and b_i. Interpret your results.

(Q3)Next, using the 25 b_i estimated above, estimate the following equation:

r_i - r_f = ₀ +₁ b_i where r_i - r_f = average risk premium of stock i

If the CAPM is correct, then₀ and₁ should satisfy: ₀ = 0 and ₁ = r_m - r_f

where r_m - r_f = average market risk premium

Use 95% confidence interval to determine whether ₀ = 0 and ₁ = r_m - r_f

Also report the R² and interpret it.

Deliverable:

Excel file for tasks 1, 2 and 3

(Q4)Based on your results in task (3) and the paper "CAPM: an absurd model", give your comments on the validity of CAPM. You may also justify your comments using materials from other sources.