PART 1: (25 marks)
1. Carefully explain the APT, outlining the mathematical model, underpinning it,
appropriately referenced. [8 marks]
2. Discuss, with reference to an empirical study, the applicability of APT for estimating
excess stock returns.
2
publication. It can be a more recent study or a seminal work, but not the example
discussed in class. [8 marks]
3. Briefly, provide a background information on your chosen company. [2 marks]
4. Present and explain the model you will be estimating based on the APT, in the context
of your data. Your model should be of the form:
Yt = + β1X1t + β2X2t + ut ut ~ N (0, σ2) [7 marks]
PART 2: (30 marks)
1. Collect monthly data, for a five-year period, with reference to the relevant sources, on:
a) the prices for your chosen stock
b) the corresponding market index prices
c) the relevant risk-free asset returns
d) a macroeconomic indicator of your choice
Relevant data is available from: Yahoo Finance, FRED (The Federal Reserve Bank of St. Louis),
Kenneth R. French Data Library, IMF, and the World Bank.
[6 marks]
2. Compile an Excel worksheet and import the data into EViews. [1 mark]
3. Make the necessary data transformations. [10 marks]
4. Test the variables for unit-root; carefully formulate the hypothesis and make a correction, if
possible. [6 marks]
5. Investigate the variables included in your model. Present in a table and briefly interpret
the respective summary statistics. Include two scatter plots of relevant variables.
[7 marks]
PART 3: (35 marks)
1. Estimate the model and test if it conforms to three of the classical OLS assumptions for
the residuals: homoscedasticity; no series correlation and normality. You are required to
make any corrections that are possible. [10 marks]
2. Carefully specify the hypotheses for testing the assumptions on the residuals, the
individual coefficients and the F-test for overall significance. [8 marks]
3. Correctly interpret the estimated coefficients in terms of their signs, significance and
impact on the dependent variable. [6 marks]
4. Correctly interpret the R2 and the F-statistic. [6 marks]
5. Briefly compare your findings with the article surveyed in Part 1. [5 marks]
Structure: The three parts, with the detailed instructions, should provide the structure of
your report. [2 marks]
Presentation: as per presentation instructions on p.1 of this brief [5 marks]
