Ross, Westerfield, Jaffe, and Jordan's Spreadsheet Master

Corporate Finance, 13th edition

by Brad Jordan and Joe Smolira
Version 13.0

Chapter 12
In these spreadsheets, you will learn how to use the following Excel fu

Multifactor Regression Estimates

The following conventions are used in these spreadsheets:

1) Given data in blue

2) Calculations in red

NOTE: Some functions used in these spreadsheets may require that

the "Analysis ToolPak" or "Solver Add-In" be installed in Excel.
To install these, click on the File tab
then "Excel Options," "Add-Ins" and select
"Go." Check "Analysis ToolPak" and
"Solver Add-In," then click "OK."
 the following Excel functions:

eadsheets:

equire that
 Chapter 12 - Section 5
Empirical Approaches to Asset Pricing

The In Their Own Words box by Kenneth French at the end of the chapter details the three-factor APT model that is
returns. Estimating the three-factor model can be accomplished with a multi-factor regression in Excel. We went to
factor model, which you will find on the Return Data worksheet, along with the returns for Amazon.com. On the AM
three-factor APT regression estimate for Amazon.com stock.

We should note that the three-factor data on the website may be a different scale than your return calculations. In o
decimal while the excess return of the market in the data set may be 1.53 instead of .0153. What effect would it hav
independent variables?

RWJ Excel Tip

To estimate a multi-factor linear regression, go to the Data tab, Data Analysis, and select Regression, then Ok the sa

The input box for our linear regression looks like this:
The Y input range is the dependent variable, in this case the stock returns, and the X input range is the independent
data and selected the Labels box, which will put a label on the output for the variables. Finally, we selected the Confi
interval. Because Excel will allow you to enter the X variables as an array, it is easier to make sure that the X variable
the three-factor APT model that is frequently used to explain the cross-section of average stock
or regression in Excel. We went to Ken French's website and gathered the data for the three-
eturns for Amazon.com. On the AMZN regression worksheet, you will find the results for the

e than your return calculations. In other words, the return calculation for the stock in Excel is a
d of .0153. What effect would it have on the regression if we did not change the scale of the

d select Regression, then Ok the same way we did for a single factor regression.
e X input range is the independent variables, or three-factors. We included the row above the
ables. Finally, we selected the Confidence Interval box and asked for a 95 percent confidence
ier to make sure that the X variables are in adjacent columns in the data table.
Return Data

Amazon
Date Amazon.com return
9/1/2013 $ 312.64 Mkt - Rf SMB
10/1/2013 $ 364.03 16.44% 0.0377 0.0293
11/1/2013 $ 393.62 8.13% 0.0418 -0.0149
12/1/2013 $ 398.79 1.31% 0.0312 0.0124
1/1/2014 $ 358.69 -10.06% 0.0281 -0.005
2/1/2014 $ 362.10 0.95% -0.0332 0.0086
3/1/2014 $ 336.37 -7.11% 0.0465 0.0032
4/1/2014 $ 304.13 -9.58% 0.0043 -0.0189
5/1/2014 $ 312.55 2.77% -0.0019 -0.0425
6/1/2014 $ 324.78 3.91% 0.0206 -0.0185
7/1/2014 $ 312.99 -3.63% 0.0261 0.0307
8/1/2014 $ 339.04 8.32% -0.0204 -0.0424
9/1/2014 $ 322.44 -4.90% 0.0424 0.0036
10/1/2014 $ 305.46 -5.27% -0.0197 -0.0383
11/1/2014 $ 338.64 10.86% 0.0252 0.0423
12/1/2014 $ 310.35 -8.35% 0.0255 -0.0209
1/1/2015 $ 354.53 14.24% -0.0006 0.0254
2/1/2015 $ 380.16 7.23% -0.0311 -0.0056
3/1/2015 $ 372.10 -2.12% 0.0613 0.0048
4/1/2015 $ 421.78 13.35% -0.0112 0.0302
5/1/2015 $ 429.23 1.77% 0.0059 -0.0297
6/1/2015 $ 434.09 1.13% 0.0136 0.0087
7/1/2015 $ 536.15 23.51% -0.0153 0.0283
8/1/2015 $ 512.89 -4.34% 0.0154 -0.0414
9/1/2015 $ 511.89 -0.19% -0.0604 0.0048
10/1/2015 $ 625.90 22.27% -0.0308 -0.0264
11/1/2015 $ 664.80 6.22% 0.0775 -0.0197
12/1/2015 $ 675.89 1.67% 0.0056 0.0364
1/1/2016 $ 587.00 -13.15% -0.0217 -0.0282
2/1/2016 $ 552.52 -5.87% -0.0577 -0.0339
3/1/2016 $ 593.64 7.44% -0.0007 0.0078
4/1/2016 $ 659.59 11.11% 0.0696 0.0088
5/1/2016 $ 722.79 9.58% 0.0092 0.0068
6/1/2016 $ 715.62 -0.99% 0.0178 -0.0026
7/1/2016 $ 758.81 6.04% -0.0005 0.0065
8/1/2016 $ 769.16 1.36% 0.0395 0.0265
9/1/2016 $ 837.31 8.86% 0.005 0.0115
10/1/2016 $ 789.82 -5.67% 0.0025 0.0202
11/1/2016 $ 750.57 -4.97% -0.0202 -0.0437
12/1/2016 $ 768.66 2.41% 0.0486 0.0549
1/1/2017 $ 823.48 7.13% 0.0182 0.0007
2/1/2017 $ 845.04 2.62% 0.0194 -0.0102
3/1/2017 $ 886.54 4.91% 0.0357 -0.02
4/1/2017 $ 924.99 4.34% 0.0017 0.0119
5/1/2017 $ 994.62 7.53% 0.0109 0.0073
6/1/2017 $ 968.00 -2.68% 0.0106 -0.0255
7/1/2017 $ 987.78 2.04% 0.0078 0.0216
8/1/2017 $ 980.60 -0.73% 0.0187 -0.014
9/1/2017 $ 961.35 -1.96% 0.0016 -0.0169
10/1/2017 $ 1,105.28 14.97% 0.0251 0.0454
11/1/2017 $ 1,176.75 6.47% 0.0225 -0.0194
12/1/2017 $ 1,169.47 -0.62% 0.0312 -0.0066
1/1/2018 $ 1,450.89 24.06% 0.0106 -0.0126
2/1/2018 $ 1,512.45 4.24% 0.0558 -0.0303
3/1/2018 $ 1,447.34 -4.30% -0.0365 0.0028
4/1/2018 $ 1,566.13 8.21% -0.0235 0.0393
5/1/2018 $ 1,629.62 4.05% 0.0029 0.0109
6/1/2018 $ 1,699.80 4.31% 0.0265 0.0524
7/1/2018 $ 1,777.44 4.57% 0.0048 0.0117
8/1/2018 $ 2,012.71 13.24% 0.0319 -0.0215
9/1/2018 $ 2,003.00 -0.48% 0.0344 0.0123
 HML
-0.0119
0.0114
0.0024
-0.0031
-0.0209
-0.0040
0.0508
0.0114
-0.0027
-0.0074
0.0001
-0.0058
-0.0123
-0.0168
-0.0299
0.0206
-0.0347
-0.0179
-0.0046
0.0186
-0.0137
-0.0079
-0.0412
0.0268
0.0052
-0.0008
-0.0052
-0.0258
0.0210
-0.0048
0.0112
0.0326
-0.0181
-0.0149
-0.0113
0.0331
-0.0148
0.0418
0.0827
0.0360
-0.0278
-0.0180
-0.0318
-0.0190
-0.0378
0.0132
-0.0028
-0.0224
0.0303
-0.0006
-0.0005
0.0014
-0.0137
-0.0119
-0.0011
0.0053
-0.0316
-0.0239
0.0039
-0.0412
SUMMARY OUTPUT

Regression Statistics
Multiple R 0.30685588184
R Square 0.09416053222
Adjusted R Square 0.04563341788
Standard Error 0.07818719562
Observations 60

ANOVA
df SS MS F Significance F
Regression 3 0.03558581898 0.011862 1.940369492 0.13354442
Residual 56 0.34234130333 0.006113
Total 59 0.3779271223

Coefficients Standard Error t Stat P-value Lower 95% Upper 95%

Intercept 0.03572029289 0.01094399249 3.263918 0.001876051 0.013796842 0.057643744
Mkt - Rf -0.05083931065 0.36313148737 -0.140002 0.889160366 -0.77827909 0.676600471
SMB 0.88691517495 0.41283924166 2.148331 0.036027126 0.059898796 1.713931554
HML 0.3796269047 0.43359954917 0.875524 0.385028677 -0.48897737 1.248231177
Lower 95.0% Upper 95.0%
0.013796842 0.0576437443
-0.77827909 0.6766004712
0.059898796 1.7139315542
-0.48897737 1.2482311773
 Chapter 12 - Master It!

The Fama-French three-factor model has become a popular APT model. However, another model called the Carhart four-factor model has also been proposed (Mark
Carhart, “On Persistence in Mutual Fund Performance,” Journal of Finance 52 (1997), pp. 57–82). In the four-factor model, the first three-factors are the same as the
Fama-French three-factor model. The fourth factor in the model is momentum. The momentum factor is constructed by
the monthly return difference between the returns on the high and low prior return portfolios, to capture the cross-sectional return patterns.

The factors for the four-factor model are available on Kenneth French's website (http://mba.tuck.dartmouth.edu/~kfrench). Note, there is a file for the three-factor
model as well as a separate file for the momentum factor.

Professor Kenneth French's website

a. The data files are zipped. You will need to open the Zip file, save the text file, and then open the text file in Excel. Make sure you download the monthly factors. The
Text Import Wizard in Excel will walk you through the steps necessary to import the text files into columns. When you get the data table set up, estimate the four-
factor model and answer the following questions for the stock and mutual fund you selected in the previous chapter.

1) Would you expect the explanatory power of the four-factor regression to be higher or lower than the market model regression from the previous chapter? Why?
2) Are the alpha and beta for each regression statistically different from zero?
3) How do you interpret the betas for each independent variable for the stock and the mutual fund?
4) Which of the two regression estimates has the highest R squared? Is this what you would have expected? Why?
 Master it! Solution

Mutual fund
a. Month/Year Stock price price
IBM FMAGX
4/1/2016 IBM FMAGX
5/1/2016
6/1/2016
7/1/2016
8/1/2016
9/1/2016
10/1/2016
11/1/2016
12/1/2016
1/1/2017
2/1/2017
3/1/2017
4/1/2017
5/1/2017
6/1/2017
7/1/2017
8/1/2017
9/1/2017
10/1/2017
11/1/2017
12/1/2017
1/1/2018
2/1/2018
3/1/2018
4/1/2018
5/1/2018
6/1/2018
7/1/2018
8/1/2018
9/1/2018
10/1/2018
11/1/2018
12/1/2018
1/1/2019
2/1/2019
3/1/2019
 4/1/2019
5/1/2019
6/1/2019
7/1/2019
8/1/2019
9/1/2019
10/1/2019
11/1/2019
12/1/2019
1/1/2020
2/1/2020
3/1/2020
4/1/2020
5/1/2020
6/1/2020
7/1/2020
8/1/2020
9/1/2020
10/1/2020
11/1/2020
12/1/2020
1/1/2021
2/1/2021
3/1/2021
4/1/2021
Mkt - Rf SMB HML Momentum