1. After you merged both datasets as described in the Instructions: Compute the market capitalization as [abs(PRC) * SHROUT] for each stock in each month. Why are some prices negative? (You might need to lookup the definition of PRC in WRDS, for example with an internet search, to answer this question.) Why can closing prices at time “t” be negative? [select every answer that you think is correct]: [removed] Missing bid quotes [removed] the specific stock is not trading on the current exchange at time t  [removed] negative prices are averages across bid and ask quotes  [removed] prices can be negative, if the companies liabilities are higher than its assets 10 points    Question 2 1. For each stock, compute the average excess return and the standard deviation over the period from January 2000 to December 2010 (to calculate such summary statistics the PivotTable is very useful). Which stock has the highest average  excess  return? (Reminder: excess return is the difference between the return and the risk-free rate) [removed] Stock with PERMNO 82526. [removed] Stock with PERMNO 82542. [removed] Stock with PERMNO 76544. [removed] Stock with PERMNO 86302. 10 points    Question 3 1. Now compute the Sharpe ratio for each stock over this period. Which stock looks most attractive to you in terms of the tradeoff between return and risk over this period? [removed] Stock with PERMNO 76695, because it has the highest Sharpe ratio. [removed] Stock with PERMNO 82542, because it has the highest Sharpe ratio. [removed] Stock with PERMNO 82526, because it has the highest average excess return. [removed] Stock with PERMNO  76695, because it has the highest average excess return. 10 points    Question 4 1. Do you observe any pattern regarding the Sharpe ratio of a stock and its average market cap (computed per PERMNO over the whole sample period)? Run a simple cross-sectional regression to check. [removed] A smaller market cap is associated with a higher  Sharpe ratio , and this relation is statistically significant  (i.e., t-statistic is below -2 or above 2)  . [removed] A smaller market cap is associated with a higher Sharpe ratio, but this relation is not statistically significant ( i.e., t-statistic is between-2 and 2 ). [removed] A smaller market cap is associated with a lower Sharpe ratio, and this relation is statistically significant ( i.e, t-statistic is  below  -2 or above 2) . [removed] A smaller market cap is associated with a lower Sharpe ratio, but this relation is not statistically significant ( i.e., t-statistic is between-2 and 2) . 10 points    Question 5 1. Now run a formal CAPM (“market model”) time-series regression for each of the 100 firms (you can use the "LINEST" function in EXCEL to do so). Estimate the market model over the entire sample period. Which stock has the largest beta estimate? Insert the PERMNO of the stock with the largest Beta coefficient below. [removed] 10 points    Question 6 1. Make ...

1. 1.
After you merged both datasets as described in the Instructions:
Compute the market capitalization as [abs(PRC) * SHROUT]
for each stock in each month. Why are some prices negative?
(You might need to lookup the definition of PRC in WRDS, for
example with an internet search, to answer this question.)
Why can closing prices at time “t” be negative? [select every
answer that you think is correct]:
[removed]
Missing bid quotes
[removed]
the specific stock is not trading on the current exchange at time
t
[removed]
negative prices are averages across bid and ask quotes
[removed]
prices can be negative, if the companies liabilities are higher
than its assets
10 points
Question 2
1.
For each stock, compute the average excess return and the
standard deviation over the period from January 2000 to
December 2010 (to calculate such summary statistics the
PivotTable is very useful). Which stock has the highest average
excess
return? (Reminder: excess return is the difference between the

2. return and the risk-free rate)
[removed]
Stock with PERMNO 82526.
[removed]
Stock with PERMNO 82542.
[removed]
Stock with PERMNO 76544.
[removed]
Stock with PERMNO 86302.
10 points
Question 3
1.
Now compute the Sharpe ratio for each stock over this period.
Which stock looks most attractive to you in terms of the
tradeoff between return and risk over this period?
[removed]
Stock with PERMNO 76695, because it has the highest Sharpe
ratio.
[removed]
Stock with PERMNO 82542, because it has the highest Sharpe
ratio.
[removed]
Stock with PERMNO 82526, because it has the highest average
excess return.
[removed]

3. Stock with PERMNO 76695, because it has the highest
average excess return.
10 points
Question 4
1.
Do you observe any pattern regarding the Sharpe ratio of a
stock and its average market cap (computed per PERMNO over
the whole sample period)? Run a simple cross-sectional
regression to check.
[removed]
A smaller market cap is associated with a higher
Sharpe ratio
, and this relation is statistically significant
(i.e., t-statistic is below -2 or above 2)
.
[removed]
A smaller market cap is associated with a higher Sharpe ratio,
but this relation is not statistically significant (
i.e., t-statistic is
between-2 and 2 ).
[removed]
A smaller market cap is associated with a lower Sharpe ratio,
and this relation is statistically significant (
i.e,
t-statistic is
below
-2

4. or above
2) .
[removed]
A smaller market cap is associated with a lower Sharpe ratio,
but this relation is not statistically significant ( i.e.,
t-statistic is between-2 and 2) .
10 points
Question 5
1.
Now run a formal CAPM (“market model”) time-series
regression for each of the 100 firms (you can use the "LINEST"
function in EXCEL to do so). Estimate the market model over
the entire sample period. Which stock has the largest beta
estimate? Insert the PERMNO of the stock with the largest Beta
coefficient below.
[removed]
10 points
Question 6
1.
Make a scatter plot with on the vertical axis the historical
average
excess return
of all stocks and on the horizontal axis the stock’s beta
estimates over the full sample period. Also add a linear trend
line, which is the security market line (SML). Does this plot
support the CAPM predictions?
Indicate every correct statement from the list below.
[removed]

5. The estimated slope coefficient is positive, which is
consistent with the CAPM.
[removed]
The estimated slope coefficient is positive, which is NOT
consistent with the CAPM.
[removed]
The estimated intercept is positive, which is
consistent with the CAPM.
[removed]
The estimated intercept is positive, which is
NOT
consistent with the CAPM.
[removed]
The estimated slope coefficient is negative, which is
consistent with the CAPM.
[removed]
The estimated slope coefficient is negative, which is
NOT
consistent with the CAPM.
[removed]
The estimated intercept is negative, which is consistent with the
CAPM

6. [removed]
The estimated intercept is negative, which is NOT consistent
with the CAPM
10 points
Question 7
1.
Please indicate the Coefficient of determination (R2) from the
regression in Question 6 (i.e. the estimated SML) that is closest
to what you find:
[removed]
6%
[removed]
8%
[removed]
10%
[removed]
12%
10 points
Question 8
1.
Now run a cross-sectional regression. Explain the
wholesample
average excess returns of each stock by the
wholesample
average MARKETCAP
of each stock
and the estimated beta (from Question 5). What do you find?
Assume statistical significance is indicated by a
t-statistic below -2 or above 2.

7. Select every answer that corresponds with your findings.
[removed]
I find a negative and statistically significant effect of Beta to
explain excess returns.
[removed]
I find a positive and statistically significant effect of Beta to
explain excess returns.
[removed]
I find a negative and statistically significant effect of Market
Cap to explain excess returns.
[removed]
I find a positive and statistically significant effect of Market
Cap to explain excess returns.
[removed]
I find a negative but statistically insignificant effect of Beta to
explain excess returns.
[removed]
I find a positive but statistically insignificant effect of Beta to
explain excess returns.
10 points
Question 9
1.
Now run a so called Fama-MacBeth regression (2nd step), that
is: each month regress excess returns on MarketCap only, then
compute the average coefficient on Market Cap as well as the
Fama-MacBeth t-statistic, which is avg(X)/[stddev(X)/sqrt(T)],
where: X is the monthly estimated slope coefficient when

8. explaining Returns by MarketCap and T is the number of
observations (the number of months in the sample).
[removed]
Higher
MarketCap
is associated with higher returns and this relation is
statistically significant (t-statistic below -2 or above 2).
[removed]
Lower
MarketCap
is associated
with
higher returns and this relation is
statistically significant (t-statistic below -2 or above 2) .
[removed]
Higher
MarketCap
is associated
with
higher returns but this relation is not
statistically significant (t-statistic below -2 or above 2) .
[removed]
Lower
MarketCap
is associated
with
higher returns but this relation is not
statistically significant (t-statistic below -2 or above 2) .

9. 10 points
Question 10
1.
As before, run a so called Fama-MacBeth regression and
compute the Fama-MacBeth t-statistic. But this time explain
Returns by MarketCap as of January for each year, i.e. in
February to December you use the market cap estimated in
January of each year for each stock.
[removed]
Higher
MarketCap
is associated with higher returns and this relation is
statistically significant
(
t-statistic below -2 or above 2)? .
[removed]
Lower
MarketCap
is associated
with
higher returns and this relation is
statistically significant
(
t-statistic below -2 or above 2) .
[removed]
Higher
MarketCap
is associated
with
higher returns but this relation is not

10. statistically significant
(
t-statistic below -2 or above 2) .
[removed]
Lower
MarketCap
is associated
with
higher returns but this relation is not
statistically significant
(
t-statistic below -2 or above 2).
10 points
Question 11
1.
Of course, smaller stocks are also associated with higher risk.
Hence, redo the Fama-MacBeth regressions, use the MarketCap
as of January for each year, and the CAPM-beta (estimated over
the whole sample) as a control variable, to explain monthly
returns (as before).
[removed]
Higher
MarketCap
is associated with higher returns and this relation is
statistically significant
(
t-statistic below -2 or above 2) .
[removed]
Lower

11. MarketCap
is associated
with
higher returns and this relation is
statistically significant
(
t-statistic below -2 or above 2) .
[removed]
Higher
MarketCap
is associated
with
higher returns but this relation is not
statistically significant
(
t-statistic below -2 or above 2) .
[removed]
Lower
MarketCap
is associated
with
higher returns but this relation is not
statistically significant
(
t-statistic below -2 or above 2) .
10 points
Question 12
1.
Are your results so far consistent with the data you received

12. from Ken French’s website (using data from Jan-2000 to Dec-
2010)?
[removed]
Yes, because the average return of HML is negative over this
period
[removed]
Yes, because the average return of HML is positive over this
period
[removed]
No, because the average return of HML is negative over this
period
[removed]
No, because the average return of HML is positive over this
period
[removed]
Yes, because the average return of SMB is negative over this
period
[removed]
Yes, because the average return of SMB is positive over this
period
[removed]
No, because the average return of SMB is negative over this
period
[removed]
No, because the average return of SMB is positive over this
period
10 points
Question 13

13. 1.
Report the Fama-MacBeth test statistic, i.e.
sqrt(N)*avg(X)/stddev(X),
where N is the number of observations (the number of months),
and X is the monthly estimated slope coefficient on MarketCap
when explaining Returns by MarketCap and CAPM-Beta (i.e.
the slope coefficients from the previous regression).
Round the value to two decimal digits, and use the dot to
separate decimal from non-decimal digits, i.e. enter like:
12.23
Use all slope coefficients from 2005 (i.e. N=12).
[removed]