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Question 1. 

 

(a) Calculate average monthly excess returns for the seven shares and the equity index  in the spreadsheet. Report each share’s arithmetic average monthly excess return and  standard deviation of excess return (using the population version of the standard deviation  equation).  (b) Regress the monthly excess returns for each share on the monthly excess returns of  the equity index and report each share’s: alpha; beta; t‐statistics; and R squared. Also  calculate and report each share’s tracking error ‐ as implied by the betas and standard  deviations of excess returns ‐ ie from part (a). 

 

(c) Run a second pass regression by regressing the average excess returns for the shares  from part (a) on their betas and tracking errors (in variance form) from part (b) combined  with the data for the additional shares provided in the spreadsheet. Report the gamma 0,  gamma 1, gamma 2, standard errors, relevant t‐statistics and adjusted R squared (refer to  BKM section 13.1). 

 

(d) Run a multi variable regression for each of the seven shares by regressing the share’s  monthly excess returns on the monthly excess returns of the equity index and the additional  factor data (ie Fama French HML index and the Consumer Sentiment Index) provided in the  spreadsheet ‐ refer to Section 13.3 of BKM for an example of a multi factor model (NB:  we’re only running a first pass regression here) and for an explanation of the Fama‐French  factors. Report each share’s alpha, betas; t‐statistics; and adjusted R squared. 

   

Question 2. Two asset pricing models have been tested in Question 1. Use the results from  that question to evaluate these asset pricing models in the context of Epeus’ equity portfolio  construction. (300 word limit). 

   

Question 3. Research two investment managers that use multi factor models in their  investment processes. Describe the factors employed and explain how they are used in  portfolio construction. (400 word limit) 

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