Name:
FIN 235-A Advanced Statistical Modeling in Finance
Spring Semester, 2024
Class Project
Instruction:
•Each group should have 3 members. Please email me the names of your group members by
April 29, 2024.
•Type your researching findings in a file as a form of formal research report. Supporting
documents are needed (e.g. the Eviews output must be cropped and copied in your file).
You don’t need to attach the original data. Please note that the file of presentation
slides is not a report.
•The deadline of submitting your report is May 8, 2024.
•Prepare to present your findings using PowerPoints in class on May 6, 2024.
•Each group should elect a group leader based on the collective opinion of your team. The
group leader should be the one who will submit the project to me.
•Each project report should include a separate page, indicating what the contribu-
tion of each group member is.For example, you can document which member did which
subquestions. You need to give me a detailed list of every group member’s contribution to
your project. The grade that I give to each team member will be based on the entire report’s
quality and each member’s contribution. (So student A and B might receive different grades
although they are in the same group.)However, the group leader should make sure
every group member are notified of his/her contribution on this page before you
submit your project to me. If this assessment page is missing on your report, I
will assume all team members shared the work equally.
1
Question:
The traditional asset pricing model, known formally as the capital asset pricing model (CAPM)
uses only one variable to explain the returns of a portfolio/stock, and this explanatory variable is
the returns of the market as a whole. And we define the coefficient,β, to describe the systematic
risks that the firm is facing. In particular,βis the coefficient of the following regression equation:
Rit–Rf t=α+β[Rmt−Rf t] +uit
whereRitis the return of the stocks of firmiat timet,Rmtis the return of the market portfolio,
andRf tis the return of the risk-free rate.uitis the error term.
In contrast, the Fama–French model uses three variables. Fama and French started with the
observation that two classes of stocks have tended to do better than the market as a whole: (i)
small caps and (ii) stocks with a high book-to-market ratio (B/P, customarily called value stocks,
contrasted with growth stocks). They then added two factors to CAPM to reflect a portfolio’s
exposure to these two classes:
Rit–Rf t=α+β1[Rmt−Rf t] +β2SMBt+β3HMLt+uit
whereRitis the return of the portfolioiat timet,Rmtis the return of the market portfolio, and
Rf tis the return of the risk-free rate.SMBstands for “Small [market capitalization] Minus Big”
andHMLfor “High [book-to-market ratio] Minus Low”; they measure the historic excess returns
of small caps over big caps and of value stocks over growth stocks.uitis the error term.
1.
Yahoo! Finance. Plot the historical prices against time. Compute theirmonthlyreturns.
Make sure that your data ranges from January 2018 to December 2022.
2. monthly
returns of the portfolio over the sample period above.
3. monthlydata of the three factors from Ken French’s website
(http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html).
Read the instructions on the website carefully to guarantee that you are downloading the
correct data.
4.
(x-axis) using Eviews.
5.
words.
6.
using Eviews.
7.
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