2.

Go to the data library of Ken French, These returns are
expressed as a %, so you need to divide them by 100 to be
consistent with the stock returns from WRDS. Import this data
into EXCEL.
For each line in the WRDS EXCEL file, find the appropriate
Market return, SMB, HML, and risk-free rate from the French
EXCEL file, i.e. you need to merge both files by date. A
“VLOOKUP” might help you.
The 3rd file is the subsample of 100 stocks, that are used for
some questions.
Question 1
After you merged both datasets as described in the
Instructions: Compute the market capitalization as
[abs(PRC) * SHROUT] for each stock in each month. Why
are some prices negative? (You might need to lookup the
definition of PRC in WRDS, for example with an internet
search, to answer this question.)
Why can prices at time “t” be negative? [select every answer
that you think is correct]:

Question 2
For each of the hundred stocks, compute the average excess
return and the standard deviation over the period from January
2000 to December 2010 (to calculate such summary statistics
the PivotTable is very useful). Which stock has the highest
average excess return? (Reminder: excess return is the
difference between the return and the risk-free rate)

Question 3
Now compute the Sharpe ratio for each stock over this period.
Which stock looks most attractive to you in terms of the
tradeoff between return and risk over this period?

. Question 9 Now run a so called Fama-MacBeth regression (2nd step). then compute the average coefficient on Market Cap as well as the Fama-MacBeth t-statistic. which is the security market line (SML). Which stock has the largest beta estimate? Insert the PERMNO of the stock with the largest Beta coefficient below.Question 4 Do you observe any pattern regarding the Sharpe ratio of a stock and its average market cap (computed per PERMNO over the whole sample period)? Run a simple cross-sectional regression to check. where: X is the monthly estimated slope coefficient when explaining Returns by MarketCap and T is the number of observations (the number of months in the sample). the estimated SML) that is closest to what you find: Question 8 Now run a cross-sectional regression.e. Question 6 Make a scatter plot with on the vertical axis the historical average excess return of all stocks and on the horizontal axis the stock’s beta estimates over the full sample period. Question 5 Now run a formal CAPM (“market model”) time-series regression for each of the 100 firms (you can use the "LINEST" function in EXCEL to do so). Estimate the market model over the entire sample period. Question 7 Please indicate the Coefficient of determination (R2) from the regression in Question 6 (i. that is: each month regress excess returns on MarketCap only. Explain the wholesample average excess returns of each stock by the wholesample average MARKETCAP of each stock and the estimated beta (from Question 5). which is avg(X)/[stddev(X)/sqrt(T)]. Also add a linear trend line. Does this plot support the CAPM predictions?Indicate every correct statement from the list below. What do you find? Select every answer that corresponds with your findings.

Report the Fama-MacBeth test statistic. N=12). sqrt(N)*avg(X)/stddev(X).Question 10 As before. run a so called Fama-MacBeth regression and compute the Fama-MacBeth t-statistic.23 Use all slope coefficients from 2005 (i.e.e.Round the value to two decimal digits. Question 12 Are your results so far consistent with the data you received from Ken French’s website (using data from Jan-2000 to Dec2010)? Question 13 3. in February to December you use the market cap estimated in January of each year for each stock. smaller stocks are also associated with higher risk.e. 12. i. and the CAPM-beta (estimated over the whole sample) as a control variable. redo the Fama-MacBeth regressions. . enter like: 4. i. and X is the monthly estimated slope coefficient on MarketCap when explaining Returns by MarketCap and CAPM-Beta (i.e. the slope coefficients from the previous regression). use the MarketCap as of January for each year. i. to explain monthly returns (as before). Hence. Question 11 Of course. But this time explain Returns by MarketCap as of January for each year.e. and use the dot to separate decimal from non-decimal digits. where N is the number of observations (the number of months).