EViews Assignment - 1st week

The problem that follow is from the course text book. If it is referred to an EViews work
file that you yet haven’t created, you have to import the data from the corresponding
Excel file. This procedure is described in the text book.
Your solutions must be easy to follow and include figures and tables when prompted.
The best way to present the solutions is to use a Word document.
3.10 (slightly changed)
Using EViews, select the other stock series, i.e. General Electric, Microsoft and Oracle
from the ‘capm.wk1’ file and estimate a CAPM beta for the stocks (the CAPM beta has
already been estimated for Ford in chapter 3). Test the null hypothesis that the true
beta is one and also test the null hypothesis that the true alpha (intercept) is zero. What
are your conclusions?
GENERAL ELECTRIC (GE)
¿¿
ERGEt =α + β ERSANDP t + μt
Where:
ERGE = Excess Return on General Electric Stock
ERSANDP = Excess Return on Market Index
μt = Stochastic Error Term

Dependent Variable: ERGE

Method: Least Squares
Date: 11/14/20 Time: 05:39
Sample (adjusted): 2002M02 2013M04
Included observations: 135 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.  

C -0.404068 0.490036 -0.824567 0.4111

ERSANDP 1.354402 0.107236 12.63005 0.0000

R-squared 0.545327    Mean dependent var -0.242533

Adjusted R-squared 0.541909    S.D. dependent var 8.409521
S.E. of regression 5.691770    Akaike info criterion 6.330623
Sum squared resid 4308.700    Schwarz criterion 6.373665
Log likelihood -425.3171    Hannan-Quinn criter. 6.348114
F-statistic 159.5181    Durbin-Watson stat 2.102993
Prob(F-statistic) 0.000000

Source: Computation in E-view 11 output

Estimated Model
ERGEt =−0.404068+1.354402 ERSANDPt

To test the null hypothesis that the CAPM true beta of General Electric (GE) stock ( ) is one
using Test of significance approach at significance level of 5%.
The Hypotheses are:
H0 :  = 1
H1 :   1
^β−β ¿
test statistic=
SE ( ^β)
^β−β ¿ 1.354402−1 0.354402
test stat= = =
^
SE ( β) 0.107236 0.107236
test stat=¿3.30488
To obtain the critical value.
Degree of freedom = T-2
Therefore, degree of freedom =136 - 2 =134
tcrit = t134;5% = 1.9759
Conclusion: We do reject H0 since test statistics lies within rejection region. We therefore
conclude that the estimated CAPM beta of General Electric (GE) stock of 1.354402 is
significantly different from 1.

To test the null hypothesis that the CAPM true alpha (intercept) of General Electric (GE) stock
is zero using Test of significance approach (t-test) at significance level of 5%.
The Hypotheses are:
H0 : α = 0
H1 : α ≠ 0
α∗¿
test statistic=ἂ− ¿
SE( α )
α −0.404068
test stat= = =−0.824567
SE (α ) 0.490036

To obtain the critical value.

Degree of freedom = T-2
Therefore, degree of freedom =136 - 2 =134
tcrit = t134;5% = 1.9759
Conclusion: We fail to reject H0 since test statistics lies within non-rejection region. We
therefore conclude that the estimated CAPM true alpha (intercept) of General Electric (GE)
stock of -0.404068 is not significantly different from 0. Meaning that the true estimated alpha
(intercept) is not statistically significant at significance level of 5%.

To test the null hypothesis that the CAPM true alpha (intercept) of General Electric (GE) is
zero using Confidence interval approach - 95% confidence interval.
The Hypotheses are:
H0 : α = 0
H1 : α ≠ 0
α^ ± t crit x SE ( α^ )
= -0.404068 ±1.9759 x 0.490036
= (-1.37233, 0.56419)
Conclusion: Since 0 lies within the confidence interval, we do not reject H 0. We then conclude
that the CAPM true alpha (intercept) of General Electric (GE) stock of -0.404068 is not
significantly different from 0. This means that the true estimated alpha (intercept) is not
statistically significant at 95% confidence interval.
MICROSOFT
¿¿
ERMICROSOFT t =α + β ERSANDPt + μ t
Where:
ERMICROSOFT = Excess Return on Microsoft Stock
ERSANDP = Excess Return on Market Index
μt = Stochastic Error Term

Dependent Variable: ERMICROSOFT

Method: Least Squares
Date: 11/14/20 Time: 05:41
Sample (adjusted): 2002M02 2013M04
Included observations: 135 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.  

C -0.115049 0.463554 -0.248188 0.8044

ERSANDP 1.004891 0.101441 9.906135 0.0000

R-squared 0.424570    Mean dependent var 0.004801

Adjusted R-squared 0.420243    S.D. dependent var 7.071259
S.E. of regression 5.384180    Akaike info criterion 6.219511
Sum squared resid 3855.589    Schwarz criterion 6.262552
Log likelihood -417.8170    Hannan-Quinn criter. 6.237002
F-statistic 98.13151    Durbin-Watson stat 2.217387
Prob(F-statistic) 0.000000

Source: Computation in E-view 11 output

Estimated Model
ERMICROSOFT t =−0.115049+1.004891 ERSANDPt
To test the null hypothesis that the CAPM true beta of Microsoft Stock ( ) is one using Wald Tests.
The Hypotheses are:
H0 :  = 1
H1 :   1
Wald Test: C(2)=1
Wald Test:
Equation: CAPMMICROSOFT

Test Statistic Value df Probability

t-statistic  0.048217  133  0.9616

F-statistic  0.002325 (1, 133)  0.9616
Chi-square  0.002325  1  0.9615

Null Hypothesis: C(2)=1

Null Hypothesis Summary:

Normalized Restriction (= 0) Value Std. Err.

-1 + C(2)  0.004891  0.101441

Restrictions are linear in coefficients.

Source: Computation in E-view 11 output
Conclusion: The Wald test results suggest that the null hypothesis that CAPM beta of Microsoft
stock is 1 should clearly not be rejected as the p-value for the three tests (t-test, F-test, and Chi-
square) are considerably greater than 0.05 in each case. We conclude therefore that the
estimated beta of 1.004891 is not significantly different from 1.

To test the null hypothesis that the CAPM true alpha (intercept) of Microsoft stock ( α) is
zero using Confidence interval approach - 95% confidence interval.
The Hypotheses are:
H0 : α = 0
H1 : α ≠ 0
α^ ± t crit x SE ( α^ )
= -0.115049 ±1.9759 x 0.463554
= (-1.03099, 0.80088)
Conclusion: Since 0 lies within the confidence interval, we do not reject H 0. We then conclude
that the estimated CAPM alpha (intercept) of Microsoft stock of -0.115049 is not significantly
different from 0. This means that the true alpha (intercept) of Microsoft stock is not statistically
significant at 95% confidence interval.
ORACLE
¿¿
ERORACLEt =α + β ERSANDP t + μt
Where:
ERORACLE = Excess Return on Oracle Stock
ERSANDP = Excess Return on Market Index
μt = Stochastic Error Term

Dependent Variable: ERORACLE

Method: Least Squares
Date: 11/14/20 Time: 05:42
Sample (adjusted): 2002M02 2013M04
Included observations: 135 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.  

C 0.234785 0.628687 0.373452 0.7094

ERSANDP 1.092994 0.137578 7.944542 0.0000

R-squared 0.321829    Mean dependent var 0.365143

Adjusted R-squared 0.316730    S.D. dependent var 8.834003
S.E. of regression 7.302200    Akaike info criterion 6.828932
Sum squared resid 7091.842    Schwarz criterion 6.871973
Log likelihood -458.9529    Hannan-Quinn criter. 6.846423
F-statistic 63.11575    Durbin-Watson stat 1.852313
Prob(F-statistic) 0.000000

Source: Computation in E-view 11 output

Estimated Model
ERORACLEt =0.234785+1.092994 ERSANDP t
To test the null hypothesis that the CAPM true beta of Oracle stock ( ) is one using Wald Tests.
The Hypotheses are:
H0 :  = 1
H1 :   1

Wald Test: C(2)=1

Equation: CAMPORACLE

Test Statistic Value df Probability

t-statistic  0.675937  133  0.5003

F-statistic  0.456891 (1, 133)  0.5003
Chi-square  0.456891  1  0.4991

Null Hypothesis: C(2)=1

Null Hypothesis Summary:

Normalized Restriction (= 0) Value Std. Err.

-1 + C(2)  0.092994  0.137578

Restrictions are linear in coefficients.

Source: Computation in E-view 11 output
Conclusion: The Wald test results suggest that the null hypothesis that CAPM beta of Oracle
stock is 1 should clearly not be rejected as the p-value for the tests (t-test, F-test, and Chi-
square) are considerably greater than 0.05 in each case. We conclude therefore that the
estimated beta of Oracle stock of 1.004891 is not significantly different from 1.

To test the null hypothesis that the CAPM true alpha (intercept) of Oracle stock (α) is zero
using Test of significance approach (t-test) at significance level of 5%.
The Hypotheses are:
H0 : α = 0
H1 : α ≠ 0
α∗¿
test statistic=ἂ− ¿
SE( α )
α 0.234785
test stat= = =0.37345
SE (α ) 0.628687

test stat=0.37345
To obtain the critical value.
Degree of freedom = T-2
Therefore, degree of freedom =136 - 2 =134
tcrit = t134;5% = 1.9759
Conclusion: We do not reject H0 since test statistics lies within non-rejection region. We
therefore conclude that the estimated CAPM alpha (intercept) of Oracle stock of 0.234785 is
not significantly different from 0. Meaning that the true alpha (intercept) of Oracle stock is not
statistically significant at significance level of 5%.