ETF9300 Financial Econometrics

Assignment (30%) Semester I-I 2012

The due date for this assignment is Wednesday April 4.
Instructions:
1. This assignment must be submitted to your tutors mailbox on Level 5, Building
H, Cauleld Campus by 4pm on the above due date. This assignment is worth
30% of the nal mark for this unit.
2. Students who go to the same tutor can work in a group of two and submit one assign-
ment jointly. Students may work alone if they wish and submit an assignment with
just one name on it.
3. Your assignment can be hand-written or typed and you must submit your assignment
in a hard copy. Submissions in an electronic form or by e-mail are not accepted.
4. Make sure the assignment COVER SHEET is on the top of your assignment and you
must complete all sections of the cover sheet, including your tutorial day/time and
your tutors name. Also you must sign and date the cover sheet. If your assignment
does not have a cover sheet, your assignment will be returned to you unmarked. The
cover sheet is available at URL:
http://www.buseco.monash.edu.au/student/forms/assessment-coversheet.doc
You may ask your tutor to obtain any necessary information to complete the cover
sheet.
5. This assignment must be no longer than 20 pages in total (including any diagrams and
tables). Any pages in excess of this length will be ignored during assignment marking.
Also, your work must be clear and legible. If it cannot be read, or can be read only
with diculty, your assignment will be returned to you unmarked.
6. This assignment will be marked out of 60 and this mark will be converted to a mark
out of 30 for the purpose of establishing a nal mark for you in this unit.
7. Use A4 size paper and make sure it is securely stapled at the top left.
8. It is important that you keep a copy of your assignment. In addition, students must
retain their marked Assignments 1 until after the publication of the nal results.
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9. Late assignments, where approval for late submission has not been given, will be pe-
nalised by deducting 20 out of 60 marks for each business day, for up to 3 days, at
which time a mark of zero will be given.
10. If you are experiencing interference with your studies that are outside of your control,
you may be eligible to receive an assignment extension. Applications must be made
by completing the In-Semester Special Consideration Application form found at URL:
http://www.buseco.monash.edu.au/student/exams/speccon.html
The form must be submitted to Ainura Tursunalieva for approval.
Email: ainura.tursunalieva@monash.edu
Room 4.71 Level 4 Building H Cauleld Campus
11. To do this assignment you will need access to a computer with EViews. There is a
time table for the computer lab availability located between K101 and K102. This
time table is also available electronically from the following link:
https://mutts.monash.edu/mutts/timetable/bylocation.aspx?splus_year=2012
You can use computers in any of K101-K104 labs. For more details, consult with your
tutors.
12. Tutors will return assignments in class or during their consultation times.
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CAPM
The econometric model of CAPM for a portfolio , is expressed as
1
jt
1
ft
= c
j
+ ,
j
(1
mt
1
ft
) + n
jt
. (1)
where 1
jt
is the return from a portfolio , at time t, 1
ft
is the risk-free rate at time t, 1
mt
is the return from a market portfolio at time t, and n
jt
is the error term for a portfolio , at
time t, while c
j
and ,
j
indicate the unknown CAPM coecients to be estimated.
We consider two industry-portfolios (telecom and banking) from the Australian stock market
(S&P/ASX 200) along with a risk free rate (rf). The S&P/ASX 200 index is a value-weighted
and oat-adjusted stock market index of Australian stocks listed on the Australian Securities
Exchange from Standard and Poors. In the following, we match these two industry portfolios
with integers from 1 to 2. That is, telecom: j=1 and banking: j=2.
We have daily data from 17 Oct. 2001 to 31 Jan. 2012, which are stored in assignment1.wf1.
This data set is available from the unit Blackboard site. You can nd four basic raw variables
(telecom, banking, asx200, and rf) in this data set. In particular, rf is the annual rate of
90-days government bond. (One year consists of 365 days.)
You need to generate necessary variables appropriately and use variables with the same
frequency in order to address the questions of this assignment. For example, log returns of
banking can be generated by
:/c:/i:q = 100 |oq(/c:/i:q,/c:/i:q(1))
Clearly state what variables you generate along with their names, how you generate them (if
it is merely repetitive, state the procedure once and just list variables whose creation follows
the same procedure) and why you generate those variables.
Estimate the CAPM for two industry-portfolios and answer the questions 1 to 6 based on
model (1).
1. For each industry portfolio, present the regression equation, the corresponding esti-
mation result in an equation form and interpret the estimated values of c
j
and ,
j
for
, 2 f1. 2g. [8 marks]
2. For each industry portfolio, test
H
0
: c
j
= 0
H
1
: c
j
6= 0
3
for , = f1. 2g. Clearly state the procedure of this testing. [6 marks]
3. Discuss the implications of the results obtained in the question 2 in the context of
CAPM. [4 marks]
4. For each industry portfolio, perform the following test
H
0
: ,
j
= 1
H
1
: ,
j
6= 1 (2)
Clearly state the procedure of this test and interpret the test result. [5 marks]
5. Instead of (2) for the banking industry, you set up the following hypotheses
H
0
: ,
2
= 1
H
1
: ,
2
1 (3)
Perform this test. Clearly state the procedure of this test and interpret the test result.
Also, explain the dierence and implications between this test and the test (2) if any.
[8 marks]
6. Discuss and compare the implications of the results obtained in the question 4 and 5
in the context of CAPM. [6 marks]
7. A fund manager notices that the telecom industry portfolio has performed badly and
hence the banking industry portfolio has preformed better than the telecom one for
the sample period of interest. He wants to consider the following investment strategy.
(a) short selling two units of telecom industry portfolio and purchasing three units of
banking industry portfolio
(Hint: Create the return of this portfolio by rmixport=3*rbanking-2*rtelecom)
Produce a time plot of each industry portfolio. (1 marks).
Repeat the questions 1 [3 marks], 2 [3 marks], 3 [2 marks] and 5 [4 marks] for rmixport
based on the following model.
1
pt
1
ft
= c
p
+ ,
p
(1
mt
1
ft
) + n
pt
where the subscript, j represents the above new portfolio. Write a short comment (less
than 200 words) on the above strategy. [10 marks]
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