Paper, Order, or Assignment Requirements
Outline the theoretical assumptions and implications of the Capital Asset Pricing Model (CAPM) derived from papers by Sharpe (1964) and Lintner (1965). (30 marks)
How valid are the assumptions, to what extent does a breach of the assumptions invalidate the CAPM model? (10 marks)
Carry out anempirical test of the CAPM using the data file ‘Fama French’ onMoodle, downloaded from Ken French’s website, as follows:
Using the excess return model:R_pt- R_ft= α+ β*(R_mt- R_ft )+ ε_t
Test: H_(0 ):α=0 (25 marks)
Monthly stock returns for 10 industry portfolios for 30 years to the end of 2010 are included in the Fama French file. You only need to test 2 industries (look on Moodle to see which industries you have been given).
You need to do eight runs of this time series model: firstly use as portfolio returns the two industries allocated to you for the whole period January 1981 to December 2010. Secondly break this thirty year period into three ten year periods for both industries and run separate regressions for these sub-periods.
Copy the regression output into the appendices.
Summarise and interpret the regression output in the body of your assignment, assess if this agrees with the CAPM theory.
Briefly outline the background and important features of the Fama French three factor model(10 Marks)
Carry out a time series empirical test of the Fama French three factor model using the data file ‘Fama French’ on Tulip, as follows: (25 marks)
Using the excess return model:
R_pt- R_ft= α+ β_pt*(R_mt- R_ft )+s_pt*〖SMB〗_t+h_pt*〖HML〗_t+ ε_t
Test the following hypotheses:
H_0 ∶ α=0 , H_0 ∶ β=0 ,H_0 ∶ s=0 ,H_0 ∶h=0
Monthly stock returns for 10 industry portfolios for 30 years to the end of 2010 are included in the Fama French file. You only need to test 2 industries (look on Tulip to see which industries you have been given).
You need to do two runs of this time series model, one for each of the industries you have been allocated.
Copy the regression output into the appendices.
Summarise and interpret the regression output in the body of your assignment, discuss this in relation to the Fama French theory.
Compare the results from the Fama French model to the CAPM.
Read the question carefully for each section, make sure that your answer is focussed on and clearly answers the requirement of each section, marks will be mainly allocated to understanding of theory and interpretation of empirical results in the light of theory.
The assignment should use Arial 12 point font with 1.5 line spacing.
The assignment should have a maximum of 2,000 words, this does not include tables, the appendices or references.
It is expected that you will have referred to a number of academic papers and other sources. These should be referenced using the Harvard system.
The assignment assessment will be based on the following criteria:
All relevant parts of the question covered
Logically organised and developed
Easily understandable and well set out, reasonable length
Good use of academic references
Correct use of statistical techniques
Good analysis and interpretation of results
Discussion of link between theory and empirical results
Academic offences, including plagiarism, are treated very seriously in the Plymouth Business School. You may be asked to attend a meeting to discuss the originality of your assignment and also to submit an electronic copy to assess the degree of any overlap with other work.
A student who is proven to have committed an academic offence may be placing his or her degree in jeopardy. It is your responsibility as a student to make sure that you understand what constitutes an academic offence, and in particular, what plagiarism is and how to avoid it. If you want to reproduce a quotation from a text, website or article, make absolutely sure that you have clearly attributed the work. Read through the information in the document including the penalties for offences. This document is available on the student portal under My Course and Career. Click on the section called Academic Regulations and scroll down until you find the right document. If you still unsure what constitutes an academic offence, please consult student services, your personal tutor or your programme manager.
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