a) (10 points)
Test whether the CAPM can price SMB and HML.
b) (20 points)
Estimate a time series regression of the form,
(R_{pt} - R_{ft}) = a + b_{pM} (R_{Mt} - R_{ft}) + e_{pt}
for each of the ten portfolios formed on D/P. Summarize the regression results in a table. Please include parameter estimates and t-stats (according to the format below). Perform the multivariate GRS test; please report both the Gibbons-Ross-Shanken (GRS) statistic and its p-value. (10 points each)
c) (60 points)
Using all ten D/P portfolios, estimate the Fama-French three-factor model
using time-series regressions.
i) (15 points) How does the estimation of the factor premia differ in the time-series
regressions from the cross-sectional approach (used in problem set 1)?
ii) (30 points) Does the GRS test reject the three-factor model?
iii) (5 points) Does the three-factor model have difficulty pricing any portfolios in particular?
iv) (10 points) Comment on the observed patterns of factor loadings across portfolios, bearing in mind the characteristics on which the portfolios were formed.
For parts b and c, please report the statistics for the 10 portfolio in the
following way (4 digits):
Lo10 | Dec2 | Dec3 | Dec4 | Dec5 | Dec6 | Dec7 | Dec8 | Dec9 | Hi10 | |
Coefficients | ||||||||||
t-stats | ||||||||||
If you want the current version of the Adobe Acrobat Reader for other platforms, visit Adobe's web page.
Click here to download the full text of this assignment.
A histogram showing the grades for this homework is available in Acrobat's portable data format (.pdf). The file is about 4K and can only be viewed (and printed) using a copy of Acrobat Reader.
Click here to download this graph.