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Unformatted text preview: Midterm 1: Econometrics Name: Answers to each question need to be clearly written to get full credit. An answer with missing information such as the null and alternative hypothesis, p-value etc will not be given full credit. In the recent finance literature, it is suggested that asset prices are fairly well described by a so-called factor model, where excess returns are linearly explained from excess returns on a number of ‘factor portfolios’. As in the CAPM, the intercept term should be zero if the model is valid. The data set ASSETS2 contains excess returns on four factor portfolios for January 1960 to December 2002 : rmrf : excess returns market portfolio (market return minus rf ) smb : return on small stock minus return on large stock portfolio (small minus big) hml : return on value stock minus return on growth stock portfolio (value stocks have a high ratio of book-to-market value of equity, growth stocks have relatively low values of the book-to-market ratio) umd : return on high prior return portfolio minus return on low prior return portfolio. All data are for the USA. Each of the last three variables denotes the difference in returns on two hypothetical portfolios of stocks. These portfolios are re-formed each month on the basis of the most recent available information on firm size, book-to-market value of equity and historical returns, respectively. The hml factor is based on the ratio of book value to market value of equity, and reflects the difference in returns between a portfolio of stocks with a high book-to-market ratio (value stocks) and portfolio of stocks with a low book-to-market ratio (growth stocks). In addition to the excess returns on these four factors, we have observations on the excess returns on ten different ‘assets’, which are ten portfolios of stocks, maintained by the Center for Research in Security Prices (CRSP). These portfolios are size based, which means that portfolio 1 contains the 10% smallest firms listed at the New York Stock Exchange and portfolio 10 contains the 10% largest firms that are listed. Excess returns Exchange and portfolio 10 contains the 10% largest firms that are listed....
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- Spring '08
- Econometrics, R10, wald coefficient test