QM 3, Case 4

a)
i) Regression Walt Disney: ResDisney = 0,008 + 1,177*market + E
ii) Regression Home Depot: ResHome = 0,005 + 1,031*market + E
b) It would be characterized by zero autocorrelation, because if the pervious
time period cannot be used to predict the current one then there is no
correlation between them. Or the direction of the correlation between is
simply unknown (and/or fluctuating between negative, zero, and positive)
c)
i) The values are shifted one time period for the lag column of data. Used to
compare previous periods with the current one.
ii) No!

iii) Less than 191 because some answers might occur twice
d)
i) Test statistic for null hypothesis (beta) = 0
Disney: (1,117 – 0) / 0,089 = 13,22
Home depot: (1,031-0) / 0,102 = 10,1
Reject at 5% significance level.

Test statistic for null hypothesis = 1

 Disney = 1,989
Home = 0,304
Fail to Reject at 5% significance level.
e)
i) Test statistic for null hypothesis (alpha) = 0.
ii) Disney: (0,008-0)/0,004 = 2, Reject at 10% significance level.
Home: (0,005-0)/0,004 = 1,25, Fail to reject at 10% significance level.
f)
i) CAPM assumes that stocks have an alpha of zero because they are fairly
priced.
ii) Those three stocks that were rejected are subjects experiencing type one
error, meaning that a true null hypothesis was rejected incorrectly.
g)
i) The implied null is that January is not equal to zero and the alternative is
that it is equal to zero.
ii) Dummy is done.
Null: alpha January is equal to 0, alternative –II- not equal to zero.
i) Disney: (0,29-0)/0,014 = 20,7 Reject at 10 % significance level
ii) Home: (-0,03-0)/0,16 = -1,19 Fail to Reject at 10% significance level.

h) CAPM assumes market efficiency, which means all stocks are fairly priced and
therefore the alpha coefficient should equal zero, when the statistical test
provided evidence against the null hypothesis it also implies that the CAPM
theory might be wrong. It is also possible that a type one error occurred here,
where the test provided sufficient evidence to reject the null hypothesis,
when it should not be rejected.

i)

i) Walt Disney:
i) Period one (1 to 105): 0,006 + 1,033 *market
ii) Period two (106 to end): 0,008 + 1,302*market
ii) Home Depot:
i) Period one (1 to 105): -0,003 + 1,175*market
ii) Period two (106 to end): 0,016 + 0,846*market
j)
i) Walt Disney:
i) 0.006+1.033*market + 0.269*Interaction + 0.002*breakdummy
Period one: 0.006 + 1.033*market
Period two: 0.008 + 1.302*market
ii) Home Depot
i) -0.003 + 1.175*market -0.329*Interaction + 0.019*breakdummy
Period one: -0.003 +1.175*market
Period two: 0.016 + 0.846*market
For Disney: From 2008/10 until 2015/12 the average return for Walt Disney
was 1.302, which is higher than for period zero.
For Home: From 2008/10 until 2015/12 the average return for Home Depot was
0.846, which is less than period zero.

k)
i) The same residual sum of squares.
ii) The coefficients are not the same, however when the periods are put in
correctly in to the equation the result is the same as splitting the data. The
use of dummy variables always the data to be synthetically split, without
actually splitting it.
l) Null: Dummy variable equals interaction variable, equals zero.
i)
i) Walt Disney
(1) Reduced: SSE = 0.561
(2) Complete: SSE = 0.546
(3) F- Test = ((0.561-0.546)/(3-1))/((0.546)/(192-3)) = 2.6  8%
ii) Home Depot
(1) Reduced: SSE = 0.729
(2) Complete: SSE = 0.699
(3) F- Test = ((0.729-0.699)/(3-1))/((0.699)/(192-3)) = 4.05  2%
iii) Disney: Fail Reject null hypothesis at 10% significance level.
iv) Home Depot: Reject null hypothesis at 10% significance level.
v) Possible to use the Chow test for parameter stability
m)

i) Home Depot: (Different numbers but same results, due to different table
used, but the answer was located in the same place).
i) Alpha= 22.85  Reject
ii) Beta = -1.16  Grey area.