To determine: The first-pass regression as worked out by Chen, Roll and Ross is to be performed and the relevant summary statistics is to be tabulated along with the estimation of the 12 stocks on the two factors.
Introduction: First pass regression is a time series regression to calculate the betas of retreats portfolios.This is generally tested implication of the
1. Establishing sample data,
2. Estimating the SCL (security characteristic line), and
3. Estimating the SML (security market line).
Answer to Problem 8PS
The table given below depicts the first pass regressions.
A | B | C | D | E | F | G | H | I | |
R-Square | |||||||||
Observations | |||||||||
Intercept | |||||||||
Beta M | 0.41 | ||||||||
Beta F | |||||||||
t- intercept | |||||||||
t- Beta M | |||||||||
t- intercept | |||||||||
t- Beta M | |||||||||
t- Beta F |
Explanation of Solution
Given Information: Information provided in the question that are used to perform first-pass regression as din Chen,Roll and Ross by estimating the betas of the
The calculated first-pass regression through the table given below and tabulated the relevant summary statistics are:
A | B | C | D | E | F | G | H | I | |
R-Square | |||||||||
Observations | |||||||||
Intercept | |||||||||
Beta M | 0.41 | ||||||||
Beta F | |||||||||
t- intercept | |||||||||
t- Beta M | |||||||||
t- intercept | |||||||||
t- Beta M | |||||||||
t- Beta F |
Want to see more full solutions like this?
- The market and Stock J have the following probability distributions: Probability rM rJ 0.3 15.00 % 19.00 % 0.4 10.00 6.00 0.3 18.00 10.00 The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. Open spreadsheet Calculate the expected rate of return for the market. Do not round intermediate calculations. Round your answer to two decimal places.fill in the blank %Calculate the expected rate of return for Stock J. Do not round intermediate calculations. Round your answer to two decimal places.fill in the blank % Calculate the standard deviation for the market. Do not round intermediate calculations. Round your answer to two decimal places.fill in the blank %Calculate the standard deviation for Stock J. Do not round intermediate calculations. Round your answer to two decimal places.fill in the blank %arrow_forwardFollowing is information for the required returns and standard deviations of returns for A, B, and C. The correlation coefficients for each pair also are shown below in a matrix. Which is the portfolio you will recommend AB, AC, or BC, and why? A B C Required Rate of return 7% 10% 20% Standard Deviation 33% 54% 90% Coefficient A,B 0.16 Coefficient A,C 0.19 Coefficient B,C 0.17arrow_forwardSuppose the index model for stocks A and B is estimated with the following results: rA = 2% + 0.8RM + eA, rB = 2% + 1.2RM + eB, σM = 20%, and RM = rM − rf . The regression R2 of stocks A and B is 0.40 and 0.30, respectively. Answer the following questions. Total: (a) What is the variance of each stock? (b) What is the firm-specific risk of each stock? (c) What is the covariance between the two stocks?arrow_forward
- The table below depict the expected return CCC Berhad and XXX Berhad for Apriland May:a) Calculate the betas for both stocks.b) Discuss the problems encounters when testing the CAPM empirically.c) In light of the problems in CAPM, the APT model was proposed as an alternative. Discuss how the APT overcome the shortcoming of CAPM.arrow_forwardSuppose the index model for stocks A and B is estimated with the following results:rA = 2% + 0.8RM + eA, rB = 2% + 1.2RM + eB , σM = 20%, and RM = rM − rf . The regressionR2 of stocks A and B is 0.40 and 0.30, respectively. Answer the following questions. (a) What is the variance of each stock? (b) What is the firm-specific risk of each stock? (c) What is the covariance between the two stocks?arrow_forwardPlease fill out the parts in the above table that are shaded in yellow. You will notice that there are nine line items Please answer : Covariance with MP Correlation with Market Index Beta CAPM Req. Returnarrow_forward
- Suppose the index model for stocks A and B is estimated with the following results:rA = 2% + 0.8RM + eA, rB = 2% + 1.2RM + eB , σM = 20%, and RM = rM − rf . The regressionR2 of stocks A and B is 0.40 and 0.30, respectively.(a) What is the variance of each stock? (b) What is the firm-specific risk of each stock? (c) What is the covariance between the two stocks?arrow_forwardConsider the two (excess return) index model regression results for A and B. RA= 0.9% + 1.1RM , R-square = 0.590, and Residual Standard Deviation = 11% RB= -1.4% + 0.6RM, R-square = 0.456, and Residual Standard Deviation = 9.2% Which stock has more firm-specific risk, market risk, and greater fraction of return variability for market movement? Also, if rf were constant at 4.4% and the regression had been run using total rather than excess returns, what would have been the regression intercept for stock A (write as percentage, rounded to 2 decimal places)?arrow_forwardYou run a regression for a stock's return on a market index and find the following Excel output: Multiple R 0.35 R-Square 0.12 Adjusted R-Square 0.02 Standard Error 38.45 Observations 12 Coefficients Standard Error t-Stat p-Value Intercept 4.05 15.44 0.26 0.80 Market 1.32 0.97 1.36 0.10 The stock is ________ riskier than the typical stockarrow_forward
- You are given the following information regarding prices for a sample of stocks.a. Construct a price-weighted index for these three stocks, and compute the percentagechange in the index for the period from T to T + 1. b. Construct a value-weighted index for these three stocks, and compute the percentagechange in the index for the period from T to T + 1. c. Briefly discuss the difference in the results for the two indexes.arrow_forwardRead the box “The ‘Beta’ of a Stock” in the attachment.a. Suppose that the value of β is greater than 1 for a particular stock.Show that the variance of (R - Rf) for this stock is greater than thevariance of (Rm - Rt).b. Suppose that the value of β is less than 1 for a particular stock. Is itpossible that variance of (R - Rf) for this stock is greater than thevariance of (Rm - Rt)? (Hint: Don’t forget the regression error.) c. In a given year, the rate of return on 3-month Treasury bills is 2.0%and the rate of return on a large diversified portfolio of stocks (theS&P 500) is 5.3%. For each company listed in the table in the box,use the estimated value of β to estimate the stock’s expected rate ofreturn.arrow_forwardThe covariance between the returns on two stock is 0.0425. The standard deviations of stocks A and B are 0.2041 and 0.2944, respectively. Calculate and interpret the correlations between the two assetsarrow_forward