# Business

**Question 8**

1. Now run a cross-sectional regression. Explain the wholesample average excess returns of each stock by the wholesample average MARKETCAP of each stock and the estimated beta (from Question 5). What do you find? Assume statistical significance is indicated by a t-statistic below -2 or above 2. Select every answer that corresponds with your findings.

[removed] | I find a negative and statistically significant effect of Beta to explain excess returns. | |

[removed] | I find a positive and statistically significant effect of Beta to explain excess returns. | |

[removed] | I find a negative and statistically significant effect of Market Cap to explain excess returns. | |

[removed] | I find a positive and statistically significant effect of Market Cap to explain excess returns. | |

[removed] | I find a negative but statistically insignificant effect of Beta to explain excess returns. | |

[removed] | I find a positive but statistically insignificant effect of Beta to explain excess returns. |

**10 points **

**Question 9**

1. Now run a so called Fama-MacBeth regression (2nd step), that is: each month regress excess returns on MarketCap only, then compute the average coefficient on Market Cap as well as the Fama-MacBeth t-statistic, which is avg(X)/[stddev(X)/sqrt(T)], where: X is the monthly estimated slope coefficient when explaining Returns by MarketCap and T is the number of observations (the number of months in the sample).

[removed] | Higher MarketCap is associated with higher returns and this relation is statistically significant (t-statistic below -2 or above 2). | |

[removed] | Lower MarketCap is associated with higher returns and this relation is statistically significant (t-statistic below -2 or above 2) . | |

[removed] | Higher MarketCap is associated with higher returns but this relation is not statistically significant (t-statistic below -2 or above 2) . | |

[removed] | Lower MarketCap is associated with higher returns but this relation is not statistically significant (t-statistic below -2 or above 2) . |

**10 points **

**Question 10**

1. As before, run a so called Fama-MacBeth regression and compute the Fama-MacBeth t-statistic. But this time explain Returns by MarketCap as of January for each year, i.e. in February to December you use the market cap estimated in January of each year for each stock.

[removed] | Higher MarketCap is associated with higher returns and this relation is statistically significant (t-statistic below -2 or above 2)? . | |

[removed] | Lower MarketCap is associated with higher returns and this relation is statistically significant (t-statistic below -2 or above 2) . | |

[removed] | Higher MarketCap is associated with higher returns but this relation is not statistically significant (t-statistic below -2 or above 2) . | |

[removed] | Lower MarketCap is associated with higher returns but this relation is not statistically significant (t-statistic below -2 or above 2). |

**10 points **

**Question 11**

1. Of course, smaller stocks are also associated with higher risk. Hence, redo the Fama-MacBeth regressions, use the MarketCap as of January for each year, and the CAPM-beta (estimated over the whole sample) as a control variable, to explain monthly returns (as before).

[removed] | Higher MarketCap is associated with higher returns and this relation is statistically significant (t-statistic below -2 or above 2) . | |

[removed] | Lower MarketCap is associated with higher returns and this relation is statistically significant (t-statistic below -2 or above 2) . | |

[removed] | Higher MarketCap is associated with higher returns but this relation is not statistically significant (t-statistic below -2 or above 2) . | |

[removed] | Lower MarketCap is associated with higher returns but this relation is not statistically significant (t-statistic below -2 or above 2) . |

**10 points **

**Question 12**

1. Are your results so far consistent with the data you received from Ken French’s website (using data from Jan-2000 to Dec-2010)?

[removed] | Yes, because the average return of HML is negative over this period | |

[removed] | Yes, because the average return of HML is positive over this period | |

[removed] | No, because the average return of HML is negative over this period | |

[removed] | No, because the average return of HML is positive over this period | |

[removed] | Yes, because the average return of SMB is negative over this period | |

[removed] | Yes, because the average return of SMB is positive over this period | |

[removed] | No, because the average return of SMB is negative over this period | |

[removed] | No, because the average return of SMB is positive over this period |

**10 points **

**Question 13**

1.

Report the Fama-MacBeth test statistic, i.e. sqrt(N)*avg(X)/stddev(X), where N is the number of observations (the number of months), and X is the monthly estimated slope coefficient on MarketCap when explaining Returns by MarketCap and CAPM-Beta (i.e. the slope coefficients from the previous regression).

Round the value to two decimal digits, and use the dot to separate decimal from non-decimal digits, i.e. enter like:

**12.23**