Homework 8 – FIN535 1
Homework 8 – FIN535 1
You must submit a py file that answers these questions in the console.
Use the Industry Portfolios.csv as your test assets, converting them to excess returns using
RF in FF3.csv. Use the Mkt-RF, SMB, and HML factors in FF3.csv as your tradable factors. Use
all the data you can, ending at and including XXXXXXXXXXThe article Fama and French XXXXXXXXXXis
“Common risk factors in the returns on stocks and bonds” in Journal of Financial Economics,
vol. 33, 1993, pages 3–56.
1. Explain
iefly how Fama and French XXXXXXXXXXbuild SMB and HML from six underlying
portfolios. Include how these six underlying portfolios are constructed. One to two para-
graphs should suffice.
2. Estimate the tradable factor model. For the retail (’Rtail’) industry, report the alpha and
etas on the tradeable factors
3. (Continuing from the previous question) Using White’s XXXXXXXXXXrobust standard e
ors, re-
port which of these are significant at the 5% level
4. (Continuing from the previous question) Interpret what the significant alpha and betas
mean
5. (Continuing from the tradable factor model estimates) Use the LR statistic and 5% level
to test each of the following null hypotheses
a) Mkt-RF does not explain the covariation of industry returns
) SMB does not explain the covariation of industry returns
c) HML does not explain the covariation of industry returns
6. (Continuing from the tradable factor model estimates) Use the LR statistic and 5% level
to test the APT hypothesis.
7. Of your 4 conclusions from the previous two questions: which are changed by instead
using a finite-sample adjusted LR statistic?
1