Single Factor Model Estimation
Part I: Single Factor Model Estimation
Go to finance.yahoo.com and download monthly historical price data over the 5 year period from March 1, 2018 to February 28, 2023 of the following stocks or fund:
- a. S&P 500 index ETF (ticker: SPY)
- b. Delta (ticker: DAL)
- c. Amazon (ticker: AMZN)
- d. Apple Inc
Using the adjusted closing prices and T-bill rate of approximately 0.4% per month (for simplicity, we assume this risk free rate is constant), please answer the following questions:
(1) Assuming CAPM is correct, run regression and estimate beta of each stock using S&P 500 index as a proxy for the market portfolio.
(2) Estimate alpha of each stock using S&P 500 index as a proxy for the market portfolio.
(3) Assuming CAPM is correct, graph Security Market Line (SML). Use S&P 500 index ETF data to estimate the market risk premium.
(4) Which stock/fund has the highest alpha and which stock/fund has the lowest alpha?
