Portfolio Management Project Assignment
Download the article "Equilibrium in an Imperfect Market: A constraint in the number of securities in a portfolio" by H. Levy (1978) attached on the portal. Read the article and get familiarized with the procedure.
In empirical analysis CAPM is estimated in two stages.
Stage I (time-series regression)
Stage II (cross-section regression)
Once you have read the article go back and spend some time on the beginning of the article (pg. 643 and 644) where the procedure mentioned previously is explained.
Using the data given in file CAPMa/b.xlsx, use the procedure described in the article (Eq.1, 2, 1' and 3) and replicate it using the data in the file.
The file CAPMa/b.xlsx contains share prices of 131 shares of the largest European corporations listed. Their share prices are given between the 01.01.2001 to 31.12.2008. The file also contains an Index (MSCI) which can you can use as a proxy for your market portfolio.
After performing the regressions you would need to answer the following questions.
Answer the following questions:
a. Calculate the Betas and average returns for all stocks and describe their distributions. The distribution of Beta and the distribution of the returns individually.
b. Are these results supportive of the CAPM? Test the results of your regression and comment on them.
c. Test the hypothesis that Beta of your stocks is 1.
d. Test the hypothesis that Alpha on all your regressions is positive.
e. Do the analyses again but now include the dummy variable (listed Dummy 1) in your linear regression model. Is the coefficient significant? What do you think about this?
f. What can you say about the CAPM in general?
Assignment Files -
https://www.dropbox.com/s/6z9vhonc2j6biqr/Assignment%20Files.rar?dl=0