You Invest in a Country Named Papaf You Consider Explaining Differences in Returns by Common Factors, with Stock

question 9

Essay

You invest in a country named Papaf. You observe the stock returns on a list of stocks during
three periods.
$$\begin{array} { c c c r } \text { Stack } & \text { Periad 1 } & \text { Periad 2 } & \text { Periad 3 } \\\hline \text { A } & 14.5 \% & - 10.5 \% & 14 \% \\\text { B } & 11 \% & - 6.5 \% & 10.5 \% \\\text { C } & 7.5 \% & - 3 \% & 8 \% \\\text { D } & 5.5 \% & - 1 \% & 5 \% \\\text { E } & 2 \% \% & 2 \% & 2.5 \% \\\text { F } & - 1.5 \% & 5 \% & - 1 \%\end{array}$$ You consider explaining differences in returns by common factors, with a linear model as represented in Equation (6.9). You have two candidates for factors: movements in interest rates and changes in the local temperature measured at noon-time from the previous day. The various values of these factors are given below:
$\begin{array}{c}\begin{array}{lll} \text { Factor}\\ \text { Change in Interest Rate }\\ \text { Change in Temperature}\end{array}\begin{array}{lll} \text { Period 1}\\-3 \% \\-5 \%\end{array}\begin{array}{lll} \text { Period 2}\\+3 \% \\-3 \% \end{array}\begin{array}{lll} \text { Period3}\\-3 \% \\+5 \% \end{array}\end{array}$
a. Try to assess whether each factor has an influence on stock returns.
b. Try to estimate the intercept and the factor exposures of each asset.

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Definitions:

Parallel Search

A search for information in which several stores or slots of information are simultaneously examined to match to the target.

Primacy Effect

The tendency to remember items at the beginning of a list better than those in the middle or end.

Retrograde Amnesia

A loss of memory-access to events that occurred, or information that was learned, before an injury or the onset of a disease.

Anterograde Amnesia

A memory disorder affecting the ability to form new memories following the onset of amnesia.