(b) Estimate CAPM model (1) using OLS, make evaluation of the estimated results.

. reg rj rm
Source | SS df MS Number of obs = 400
-------------+------------------------------------------------------------------- F(1, 398) = 360.96
Model | 368.021829 1 368.021829 Prob > F = 0.0000
Residual | 405.78966 398 1.01957201 R-squared = 0.4756
-------------+------------------------------------------------------------------- Adj R-squared = 0.4743
Total | 773.811489 399 1.93937717 Root MSE = 1.0097

-----------------------------------------------------------------------------------------------------------------------------------------------
rj | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+--------------------------------------------------------------------------------------------------------------------------------
rm | .9736678 .0512487 19.00 0.000 .8729158 1.07442
_cons | .07021 .0504874 1.39 0.165 -.0290453 .1694653
-----------------------------------------------------------------------------------------------------------------------------------------------
. est store capm
From Estimate CAPM model (1) using OLS
1. Coef. Of _cons (α) = 0.07021 mean Excess return on portfolio (rjt) is 0.07021 when excess return on market portfolio (rmt) equal to 0.
Coef. Of rm ( β1) = 0.9736678 mean when excess return on market portfolio (rmt) change to 1 unit, Excess return on portfolio (rjt) change to 0.9736678
2. F(1, 398) = 360.96 is Mean Square Model divided by the Mean Square Residual and than compare with critical values of the F-distribution at F(0.05,1,398) = 3.841,
F(1, 398) > F(0.05,1,398) that mean we will reject H0 (β1 is not equal to 0).
Prob > F = 0.0000 mean rm can predict rj because The p-value is smaller than level of significance (0.05).
3. R-squared = 0.4756 mean the independent variable (rm) can predict the dependent variable (rj) as 47.56%.
4. P>|t| mean rm is statistically significant because its p-value is less than 0.05.
_cons is not statistically significant because its p-value is more than 0.05.

(c) Estimate FF model (2) using OLS, make evaluation of the estimated results.
. reg rj rm rsmb rhml
Source | SS df MS Number of obs = 400
-------------+------------------------------------------------------------------------------ F(3, 396) = 142.25
Model | 401.372978 3 133.790993 Prob > F = 0.0000
Residual | 372.438511 396 .940501291 R-squared = 0.5187
-------------+------------------------------------------------------------------------------ Adj R-squared = 0.5150
Total | 773.811489 399 1.93937717 Root MSE = .96979

----------------------------------------------------------------------------------------------------------------------------------------------
rj | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+-------------------------------------------------------------------------------------------------------------------------------
rm | .9627065 .0496681 19.38 0.000 .8650604 1.060353
rsmb | .570524 .0988812 5.77 0.000 .3761262 .7649218
rhml | .4365382 .2327178 1.88 0.061 -.0209787 .8940551
_cons | .0525321 .0485985 1.08 0.280 -.0430112 .1480755
------------------------------------------------------------------------------------------------------------------------------------------------
From Estimate FF model (2) using OLS
1. Coef. Of _cons (α) = 0.0525321 mean rj is 0.0525321 when independent variables (rm, rsmb and rhml) equal to 0.
Coef. Of rm ( β1) = 0.9627065 mean when rm change to 1 unit, rj change to 0.9627065.
Coef. Of rsmb ( β2) = 0.570524 mean when rsmb change to 1 unit, rj change to 0.570524.
Coef. Of rhml ( β3) = 0.4365382 mean when rhml change to 1 unit, rj change to 0.4365382
2. F(3, 396) = 142.95 is Mean Square Model divided by the Mean Square Residual and than compare with critical values of the F-distribution at F(0.05, 3, 396) = 2.605,
F(3, 396) > F(0.05, 3, 396) that mean we will reject H0 (β1 is not equal to 0).
Prob > F = 0.0000 mean rm, rsmb and rhml can predict rj because The p-value is smaller than level of significance (0.05).
3. R-squared = 0.5187 mean the independent variable (rm, rsmb and rhml) can predict the dependent variable (rj) as 51.87%.
4. P>|t| _cons is not statistically significant because its p-value is more than 0.05.
rm is statistically significant because its p-value is less than 0.05.
rsmb is statistically significant because its p-value is less than 0.05.
rhml is not statistically significant because its p-value is more than 0.05.

(d) Perform hypothesis testing to test whether Jensen Alpha is statistically equal to zero or not. State null hypothesis and make conclusion of the test result.
. test _cons
( 1) _cons = 0
 F( 1, 396) = 1.17
Prob > F = 0.2804
Hypothesis: H0 : _cons coef. (α) = 0
H1: _cons coef. (α) ≠ 0
Conclusion:
At the 0.05 significance level, Prob > F = 0.2804 > 0.05 so it is not reject H0 . So, _cons is not statistically significant.
(e) Perform hypothesis testing to test whether portfolio j has the same risk as the market or not. State null hypothesis and make conclusion of the test result.
. test rm=1
( 1) rm = 1
F( 1, 396) = 0.56
Prob > F = 0.4532
Hypothesis: H0 : _cons coef. (β1) = 1
H1: _cons coef. (β1) ≠ 1
Conclusion:
At the 0.05 significance level, Prob > F = 0.4532 > 0.05 so it is not reject H0 .
_cons is not statistically significant.
(f) Perform hypothesis testing to test which model between CAPM and FF is more appropriate in this case. State null hypothesis and make conclusion of the test result.
. est table capm FF, star(.1 .05 .01) stat(N rss F r2 r2_a)
. do "C:\Users\Windows\AppData\Local\Temp\STD00000000.tmp"
. test rsmb rhml
( 1) rsmb = 0
( 2) rhml = 0
F( 2, 396) = 17.73
Prob > F = 0.0000
Hypothesis: H0 : β1= β2 = 0
H1: β1≠β2 ≠ 0
Conclusion:
At the 0.05 significance level, Prob > F = 0.0000 < 0.05 so it is reject H0 .
rsmb and rhml statistically significant.
according to the table below, FF model is more appropriate than CAPM model in this case because FF model have less rss and standard errors value than CAPM model and more R-squared
and adjusted R-squared than CAPM model that present FF model is better in data explaining.

. est table capm FF, star(.1 .05 .01) stat(N rss F r2 r2_a) . esttab capm FF, se star(* .1 ** .05 *** .01) stats(N rss F r2 r2_a)
---------------------------------------------- -----------------------------------------------------------
Variable | capm FF (1) (2)
-------------+-------------------------------- rj rj
rm | .97366784*** .96270651*** -----------------------------------------------------------
rsmb | .57052399*** rm 0.974*** 0.963***
rhml | .43653822* (0.0512) (0.0497)
_cons | .07021003 .05253212 rsmb 0.571***
-------------+-------------------------------- (0.0989)
N| 400 400 rhml 0.437*
rss | 405.78966 372.43851 (0.233)
F | 360.95717 142.25498 _cons 0.0702 0.0525
r2 | .47559623 .51869607 (0.0505) (0.0486)
r2_a | .47427863 .51504983 ------------------------------------------------------------
---------------------------------------------- N 400 400
legend: * p<.1; ** p<.05; *** p<.01 rss 405.8 372.4
F 361.0 142.3
r2 0.476 0.519
r2_a 0.474 0.515
------------------------------------------------------------
Standard errors in parentheses
* p<.1, ** p<.05, *** p<.01
end of do-file
. log close
name: <unnamed>
log: D:\Master program\Econometrics\Workshop\GWS1-CAPM-FF.log
log type: text closed on: 24 Aug 2023, 10:43:16