FINA5521 Mock Exam
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FINA5521 Mock Exam
You are required to answer all questions in the Excel template with the Excel file renamed to contain your full name and Student ID.
Question 1 (32 marks): Please include all your answers for this question in Excel sheets 1.1-1.2.
Due to the unsatisfactory performance of the CAPM in explaining realized asset returns, a number of models have been developed to capture the anomalies relating to the CAPM, including the Dual-Beta model and Fama and French (1993) three-factor (FF3F) model. As we know, to test for CAPM, we
run the following regression for asset i
(1) Rit − Rft = α + β(Rmt − Rft ) + ut .
The dual-beta model (DBM) estimates separately the parameters for up-market when the excess return for the market index is non-negative, and the parameters for down-market when the excess return for the market index is negative. The dual-beta model can thus be expressed as:
(2) Rit − Rft = αup D + βup (R t − Rft )D + αdown (1 − D) + βdown (R t − Rft )(1 − D) + et ,
where αup , αdown , βup , and βdown are the estimated parameters for up-market and down-market days, respectively; R t = Rmt on days when the market index does not decline and R t = Rmt on days when it does; D is a dummy variable, which takes the value of 1 when the market index return is non-negative and zero otherwise. If there is no asymmetry in beta, then the DBM is identical to the standard CAPM model.
1.1. (15 marks) Preliminary analysis of the daily return data for the US transportation industry value- weighted index in the US over the sample period of 1 Jan 2018 to 31 Dec 2020. Please use the Excel sheet “1.1 My data” .
a. From Kenneth French’s data library,1 download the daily data of the FF3F, including the riskfree rate, and the transportation index return2 (SIC code 41) from “49 Industry Portfolios [Daily].
b. In columns B to C, list the returns for the CAPM regression.
c. Use the “Data Analysis” add-in to report the summary statistics for the dependent and independent variables used in the CAPM regression. Comment in no more than three sentences in the designated space.
d. Plot the two time series line plots in one graph.
e. Add the relevant variables to be used for the DBM.
1.2. (17 marks) Estimation and comparison of the CAPM and DBM regression results. Please use the Excel sheet “1.2 CAPM DBM” .
a. Report the CAPM and DBM regression results.
b. Test the market beta for CAPM, H0 : β= 1 against H1 : β ≠ 1 . Note that for the test H0 : βi = c (where c is a constant), the t-stat is calculated as t = (b − c)SE (b) .
c. Similar to Task b, test the up-market beta and down-market beta for the Dual-Beta Model, i.e., H0 : βup = 1 against H1 : βup ≠ 1 and H0 : βdown = 1 against H1 : βdown ≠ 1 .
d. In no more than six sentences, compare and succinctly discuss the slope estimates, bCAPM ,bup , bdown . , respectively.
2022-10-31