Project description

ABF322 COURSEWORK ~ Term 2

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 a time series empirical test of the CAPM using the data file ‘Fama French’ on Tulip, downloaded from Ken French’s website, as follows:

Using the excess return model:

Test: (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 Tulip 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:

Test the following hypotheses:

, , ,

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.

NOTES

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