**Econometrics assignment, Econ 134A**

If you do not want to turn in the assignment in lecture on the due date, you can turn it in early during any Econ 134A lecture or section, during office hours, or in my box in the Econ Administrative office (NH, 2100 wing).

In this assignment, you are to estimate a security market line. You have current information about beta and expected annual return on 5 assets, as given in the following table:

Beta |
Expected return |

0.25 |
0.03 |

0.5 |
0.05 |

0.8 |
0.075 |

1.25 |
0.125 |

1.5 |
0.15 |

(Note that expected return is a decimal, so the first asset has an expected return of 3.0%.)

Please do the following and turn in a 2-4 page, double-space typed report to answer the following:

- Run a regression line to determine the slope and y-intercept of the security market line. If you need help figuring out the regression line to run, you can refer to Chapter 11 and find the graph that shows this. Include a printout of the regression work done as an appendix (which will not count against the 4-page limit). You can use any computer program you want to run your regression.
- Explain how to interpret your regression, including what the slope and y-intercept mean in terms we have used in this class. Calculate 95% confidence intervals for the slope and y-intercept. (Note: Even if a computer printout shows a 95% confidence interval, you must still show how it was calculated.)
- Look up the current return on one-year Treasury bills/notes as your risk-free rate. Two good sources are http://fxtrade.oanda.com/analysis/economic-indicators/united-states/rates/yield-curve and http://online.wsj.com/mdc/public/page/mdc_bonds.html. In your report, please state your source and the date used.
- Given the current risk-free rate, does the regression estimate of your risk-free rate match the actual current risk-free rate? Use confidence intervals to help answer this question.
- What is the current expected market rate of return (based on your regression)?

Please show all of your work and/or explain how you get your answers. If you use a statistical package to calculate any of the above answers, you still need to show how these numbers are calculated in your report.

You can work with up to two other people currently enrolled in Econ 134A on your report, and can turn in a single report for the whole group. If you work in a group, you may not get help by those outside your group on this assignment (except from the instructor and/or a TA). If you turn in a report individually, you can consult up to three other students currently enrolled in Econ 134A for help, but nobody else (except from the instructor and/or a TA). If you consult others in the class, please state who you consulted with on your final report.

*Note on academic misconduct*: It is academic misconduct on this homework assignment to use anybody else’s computer output to answer these questions. You must complete the regressions for your report by yourself (or within your group), but you can get help on how to do regressions in general from any person or source you desire. Each report must be done independently of other reports.

Anyone turning in the assignment late will be deducted 10% of their score for every 24 hours (or fraction thereof) the assignment is turned in late. Exception: Assignments turned in after Monday, September 12, 11:30 am, will receive a score of 0.

**Category:**Economics, General Economics

**Benjie**

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