Assignment 5
Dierently from previous assignments, let’s suppose we do not believe in the CAPM and we think there is a second factor (in addition to the market portfolio) which aects the return of assets. Therefore we believe the following is true
R−Rf =α+β(Rm−Rf)+γF+ε
where F is the second factor. Unfortunately F is not observed, but a proxy can be obtained from some excess returns in the market.
From the data set “mfunds” choose the same return R as in assignments 2 and 3, and choose an additional excess return for F.
1) Estimate the parameters and compute their variance (assuming homoskedasticity)
2) Do you think your estimates may have some multicollinearity problem?
3) Compute the condence intervals of the 3 parameters
4) Test for the joint hypothesis of β = 0 and γ = 0 (F-test)
5) Is β = γ?
6) Compute the R2 and the R ̄2 of the regression
7) What do you think about the extended CAPM you just estimated compared to the standard CAPM you estimate in previous assignments?