# A. Provide definitions for the 8 variables included in the datafile Explain the basic characteristics of the of two industries,

01 / 10 / 2021 Electrical engineering

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A. Provide definitions for the 8 variables included in the datafile Explain the basic characteristics of the of two industries, as well as what the explanatory variables are, and why they may be relevant. (hint: data descriptions are available from the sources noted above, you may Google various industries for industry characteristics, and for the explanatory variables read the article given in references). (5 marks)
B. Provide and discuss summary statistics for all data series, and test for the equality of the mean returns between your two industry portfolios. (hint: make sure you discuss risk, average returns, skewness, kurtosis, normality, etc) (5 marks)
C. Estimate the following model:
(𝑖𝑛𝑑𝑢𝑠𝑡𝑟𝑦𝑡 −𝑓_𝑟𝑓 𝑡) = 𝛽0 +𝛽1𝑓_𝑚𝑘𝑡_𝑟𝑓 𝑡 +𝛽2𝑓_𝑐𝑚𝑎𝑡 +𝛽3𝑓_𝑟𝑚𝑤𝑡 +𝛽4𝑓_𝑠𝑚𝑏𝑡 +𝛽5𝑓_ℎ𝑚𝑙𝑡 + 𝜀𝑡
for both industry portfolios in Eviews file, and present the fitted equations. Which parameters are statistically significant at the 5% level? Carefully interpret and discuss your results. (5 marks)
D. Conduct a test for the validity of the CAPM. What do you find? (5 marks) [hint: the CAPM equation is given by (𝑖𝑛𝑑𝑢𝑠𝑡𝑟𝑦𝑡 −𝑓_𝑟𝑓 𝑡) = 𝛽1𝑓_𝑚𝑘𝑡_𝑟𝑓 𝑡 + 𝑢𝑡]
E. Conduct the basic diagnostic tests on the estimated model, i.e. autocorrelation (use 4 lags of residuals), heteroskedasticity (no cross product), non-normality, misspecification
of functional form (only quadratic term). Comment on your results and carry out remedies for problems you encounter. Do the results change after you have applied remedies? (10 marks)
References
Fama, E. F. and French, K. R., A Five-Factor Asset Pricing Model (September 2014). Fama-Miller Working Paper. Available at SSRN: http://ssrn

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