FINA 6204
Problem Set 1

The purpose of the assignment is to review basic hypothesis testing and regression techniques. There is an appendix in your textbook, Appendix C: Using Excel to Conduct Analysis, which may help you with running regressions in Microsoft Excel. You may also wish to use a basic statistics text for guidance if needed. I have also provided you with a table with the t distribution.

If you have an older version of EXCEL and have not previously loaded the Analysis ToolPak, go to TOOLS, ADD-INS, Analysis Tool Pak. This will load the regression software that you will need. Then go to TOOLS, DATA ANALYSIS, Regression. Now you are ready to run regressions in EXCEL. Alternatively, if you have the most recent version of EXCEL, go to HELP and enter Load the Analysis ToolPak. Excel HELP will explain how to load the software. Once you have loaded the software you find it in DATA, DATA ANALYSIS, Regression. Now you are ready to run regressions in EXCEL

1. Measuring Systematic Risk: Beta Coefficients

The management of a publicly traded firm is interested in determining the firm’s cost of equity capital using the security market line (SML) version of the capital asset pricing model (CAPM). Management has measured the weekly returns for the market (S&P 500), its own stock, and the risk-free rate. The returns were annualized. The annualized percentage returns for each of the last 20 weeks are provided.

1a. See data in Excel file provided with this assignment. Using Excel, determine the excess rate of return on the firm’s stock (firm return less risk-free return) and the excess rate of return on the market (market return less the risk-free return). Put the two new variables (the excess return on the firm and the excess return on the market) that you have created into separate columns. (5 points)

1b. Determine the