EC4215 Autumn 2021

Formative Assessment 1
This formative assessment relates to the CAPM model – refer to Handout 1 for information on
the CAPM.

Using the attached STATA output for the CAPM model for Microsoft and Exxon-Mobil, you
should answer the following questions. You can handwrite or type your answers on the
formative assessment submission page (available in the Formative Assessments folder) and
submit your answers to Canvas (via the Assignments button) by 5pm on Monday,
September 20th 2021.

Please ensure that you retain a copy of your answers for discussion in the live real-time
interaction session that will take place on Tuesday, September 28th 2021.

Question 1: For each firm’s CAPM model, interpret the coefficient estimates.

Question 2: Given the CAPM model for each firm, comment on their estimated beta values
(refer to Handout 1 for information on the CAPM). Which firm appears most aggressive?
Which firm appears most defensive?

Question 2: Finance theory says that the intercept parameter, αj, should be zero. Does this seem
correct given the estimates?
 EC4215 Autumn 2021

CAPM: Microsoft regression

. regress Microriskprem Marketriskprem

Source SS df MS Number of obs = 132

F(1, 130) = 67.29
Model .533017867 1 .533017867 Prob > F = 0.0000
Residual 1.0297917 130 .007921475 R-squared = 0.3411
Adj R-squared = 0.3360
Total 1.56280957 131 .011929844 Root MSE = .089

Microriskprem Coef. Std. Err. t P>|t| [95% Conf. Interval]

Marketriskp~m 1.318947 .1607901 8.20 0.000 1.000843 1.637051

_cons .0060975 .0077467 0.79 0.433 -.0092285 .0214235

CAPM: Exxon-Mobil regression (note: some STATA output has been

intentionally omitted)

. regress Exomriskprem Marketriskprem

Source | SS df MS Number of obs = 132

-------------+----------------------------- F(1, 130) = 21.29
Model | .052507669 1 .052507669 Prob > F = 0.000
Residual | .320585389 130 .002466041 R-squared =
-------------+----------------------------- Adj R-squared =
Total | .373093058 131 .002848039 Root MSE = .04966

--------------------------------------------------------------------
Exomriskprem | Coef. Std. Err. t P>|t| [95% Conf. Interval]
--------------+-----------------------------------------------------
Marketriskp~m | .413969 .0897132
_cons | .0078801 .0043223
--------------------------------------------------------------------