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HW2: Regression Analysis and Hypothesis Testing

Work in a group of 2 persons with the data set, data1.xls. However, each group member
must have his/her own outputs to be submitted.
1. Open the excel spreadsheet.
RIBM is the monthly return on IBM.
RMSFT is the monthly return on Microsoft.
RM is the monthly return on S&P 500 as proxy for the market return
RIND is the monthly return on the high-tech industry
RF is the monthly T-bill return as proxy for the risk-free rate
2. Use the formulae provided in the notes to
2.1) Find average return, variance and standard deviation for RIBM
2.2) Find average return, variance and standard deviation of RMSFT
2.3) Find average return, variance and standard deviation for RM
2.4) Find average return, variance and standard deviation for RIND
2.5) Find average return, variance and standard deviation for RF
2.6) Find covariance and correlation between RIBM and RM. Also, find covariance and
correlation between RMSFT and RM. Which stock moves more closely with the market?
2.7) Compute the Sharpe ratios for IBM, MSFT, market and the industry. Which one of
the four shows the best risk-adjusted performance?
3. Create the columns for ERIBM, ERMSFT, ERM and ERIND, where
ERIBM = the excess return for IBM = RIBM - RF
ERMSFT = the excess return on MSFT = RMSFT - RF
ERM = the excess market return = RM - RF
ERIND = the excess return for the industry = RIND - RF
4. Use the procedure in the notes and run simple regression:
4.1) the one in which ERIBM is a dependent variable and ERM is an independent
variable.
4.2) the one in which ERMSFT is a dependent variable and ERM is an independent
variable.
Print and bring outputs to class.
(Do not forget to check that the variables are labeled properly.)
5. Use the procedure in the notes and run multiple regression:
5.1) the one in which ERIBM is a dependent variable, and ERM and ERIND are
independent variables.
5.2) the one in which ERMSFT is a dependent variable, and ERM and ERIND are
independent variables.
Print and bring outputs to class.
(Do not forget to check that the variables are labeled properly.)