CAPM and Fama French Model
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Using the attached Fama and French Excel File:
(a) Try to fit the CAPM equation to Company A's returns. What is the percentage of variation in Company A's returns attributable to system risk? (run a regression to answer this question)
(b) Try to fit the 3-factor Fama and French model. Discuss the magnitude and economic significance of the betas (i.e factor loadings)
(c) Assume that future returns will be consistent with the Fama and French model and no arbitrage opportunities will be present (i.e. the intercept from the regression in (b) will be zero). What will be the expected return on the Cisco Systems shares with the risk-free rate of 5% and the following risk factor premia:
Risk Factor Risk Premium
Market 7%
SMB 3%
HML 4%
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Solution Summary
This post shows how to calculate the expected rate of return on a security using Fama French model and discusses economic significance of the factor betas.
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See the attached file.
Using the attached Fama and French Excel File:
(a) Try to fit the CAPM equation to Company's returns. What is the percentage of variation in Company's returns attributable to system risk? (run a regression to answer this question)
Run regression between company risk premium and market risk premium to caculate the beta.
Goto Data - Data analysis - select regression. Use Campnay A - RF as dependable variable and Mkt-RF as independent variable. The reggression results are in CAPM Tab.
The CAPM equation would be
Re= RF + -1.674507798 *(Mkt - RF)
Percentage of variation in Company's returns attributable to ...
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