FINANCIAL ECONOMICS
1. Download the data from Canvas and calculate the arithmetic average excess returns
for the five risky portfolios during the period 1/1927-12/1963.
2. Calculate the betas of the five portfolios during 1/1927-12/1963. Use the SLOPE function in Excel that computes the slope coefficient βi of a linear regression
Ri − Rf = αi + βi (Rm − Rf ) + εi
Note that you have been provided the excess market returns.
3. Calculate the alphas of the five portfolios during 1/1927-12/1963 using the INTERCEPT function in Excel. (The intercept is, by definition, the alpha.)
4. Calculate the expected excess returns predicted by CAPM for this period. According
to the CAPM equation we should have E[Ri] − Rf = βi (E[Rm] − Rf ). Compute this
for all five portfolios, including the market portfolio.
5. Plot the security market line predicted by CAPM, as well as the actual position of the
five portfolios in (beta, expected excess return) space.
6. Now repeat the steps above for the time period 1/1964-12/2021