EC4215 Autumn 2021

Formative Assessment 3
This formative assessment relates to the CAPM model – refer to Handout 1 for information on
the CAPM.

Using the attached STATA output for the CAPM model for Microsoft and Exxon-Mobil, you
should answer the following questions. You can handwrite or type your answers on the
formative assessment submission page (available in the Formative Assessments folder) and
submit your answers to Canvas (via the Assignments button) by 5pm on Monday, October
4th 2021.

Please ensure that you retain a copy of your answers for discussion in the live real-time
interaction session that will take place on Tuesday, October 5th, 2021.

Microsoft
(a) Test at the 5% level of significance the null hypothesis that Microsoft’s “beta” value is 1
against the alternative that it is not equal to 1. What is the economic interpretation of a beta
equal to 1?
(b) Test at the 1% level of significance the null hypothesis that Microsoft’s “beta” value is
equal to 1 against the alternative that it is greater than 1. What is the economic
interpretation of a beta more than 1?
(c) Test at the 5% level of significance the hypothesis that the intercept term in the CAPM
model for Microsoft is zero, against the alternative that it is not. What do you conclude?
(d) Stating clearly which results you are using, test the assumption of the normality of
residuals. What do you conclude?

Exxon-Mobil
(e) Evaluate by testing the appropriate hypothesis, the individual significance of the
independent (explanatory) variable.
(f) Test at the 5% level of significance the null hypothesis that Exxonmobil’s “beta” value is
equal to 1 against the alternative that it is less than 1. What is the economic interpretation
of a beta less than 1?
(g) Test at the 5% level of significance the hypothesis that the intercept term in the CAPM
model for Exxon-Mobil is zero, against the alternative that it is not. What do you conclude?
(h) Stating clearly which results you are using, test the assumption of the normality of
residuals. What do you conclude?

1
 EC4215 Autumn 2021

CAPM: Microsoft regression

. regress Microriskprem Marketriskprem

Source SS df MS Number of obs = 132

F(1, 130) = 67.29
Model .533017867 1 .533017867 Prob > F = 0.0000
Residual 1.0297917 130 .007921475 R-squared = 0.3411
Adj R-squared = 0.3360
Total 1.56280957 131 .011929844 Root MSE = .089

Microriskprem Coef. Std. Err. t P>|t| [95% Conf. Interval]

Marketriskp~m 1.318947 .1607901 8.20 0.000 1.000843 1.637051

_cons .0060975 .0077467 0.79 0.433 -.0092285 .0214235

Plot of fitted regression and actual values for Microsoft CAPM model
. twoway (scatter Microriskprem Marketriskprem) (lfit Microriskprem Marketriskprem)
.4
.2
0
-.2
-.4

-.2 -.1 0 .1
Marketriskprem

Microriskprem Fitted values

2
 EC4215 Autumn 2021

Scatterplot of residuals for Microsoft CAPM regression

.4
.2
Residuals

0
-.2
-.4

19980000 20000000 20020000 20040000 20060000 20080000

year/month/day

Histogram of residuals for Microsoft CAPM regression

6
4
Density

2
0

-.4 -.2 0 .2 .4
Residuals

3
 EC4215 Autumn 2021

Descriptive statistics for residuals for Microsoft CAPM regression

. sum ehat_microsoft, detail

Residuals

Percentiles Smallest
1% -.2697919 -.2754083
5% -.1344346 -.2697919
10% -.0795064 -.1622906 Obs 132
25% -.052734 -.1412734 Sum of Wgt. 132

50% -.007803 Mean 2.43e-10

Largest Std. Dev. .0886623
75% .0432952 .206328
90% .1015085 .2103675 Variance .007861
95% .166872 .2308258 Skewness .4728427
99% .2308258 .3508247 Kurtosis 5.30344

CAPM: Exxon-Mobil regression (note: some STATA output has been

intentionally omitted)

. regress Exomriskprem Marketriskprem

Source | SS df MS Number of obs = 132

-------------+----------------------------- F(1, 130) = 21.29
Model | .052507669 1 .052507669 Prob > F = 0.000
Residual | .320585389 130 .002466041 R-squared =
-------------+----------------------------- Adj R-squared =
Total | .373093058 131 .002848039 Root MSE = .04966

--------------------------------------------------------------------
Exomriskprem | Coef. Std. Err. t P>|t| [95% Conf. Interval]
--------------+-----------------------------------------------------
Marketriskp~m | .413969 .0897132
_cons | .0078801 .0043223
--------------------------------------------------------------------

4
 EC4215 Autumn 2021

Plot of fitted regression and actual values for Exxon-Mobil CAPM model
. twoway (scatter Exomriskprem Marketriskprem) (lfit Exomriskprem Marketriskprem)
.3
.2
.1
0
-.1

-.2 -.1 0 .1
Marketriskprem

Exomriskprem Fitted values

Scatterplot of residuals for Exxon-Mobil CAPM regression

.2
.1
Residuals

0
-.1

19980000 20000000 20020000 20040000 20060000 20080000

year/month/day

5
 EC4215 Autumn 2021

Histogram of residuals for Exxon-Mobil CAPM regression

10
8
6
Density

4
2
0

-.1 0 .1 .2
Residuals

Descriptive statistics for residuals for Exxon-Mobil CAPM regression

. sum ehat_exom, detail

Residuals

Percentiles Smallest
1% -.1157319 -.1175432
5% -.0716882 -.1157319
10% -.0607106 -.0905804 Obs 132
25% -.0302743 -.0897743 Sum of Wgt. 132

50% -.0018123 Mean -1.92e-11

Largest Std. Dev. .0494694
75% .025296 .1054642
90% .0514574 .1141288 Variance .0024472
95% .0905455 .1468092 Skewness .7468705
99% .1468092 .2136763 Kurtosis 5.276165