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.

---

Definitions:

Chronic Obstructive Pulmonary Disease

A group of progressive lung diseases that obstruct airflow, making it difficult to breathe, most commonly characterized by emphysema and chronic bronchitis.

Unregulated Care Provider

An individual who provides health care services without being governed or controlled by regulatory bodies.

Blood Pressure

A vital sign measurement indicating the force of blood moving against the walls of the arteries as it is pumped by the heart.

Caffeine

A stimulant found in coffee, tea, chocolate, and certain medications, known for its ability to temporarily increase alertness and wakefulness.