FOR PROF. STAN ONLY

Exhibit 9.12, which lists 30 monthly excess returns to two different actively managed stock portfolios (A and B) and three different common risk factors (1, 2, and 3). (Note: You may find it useful to use a computer spreadsheet program (e.g., Microsoft Excel) to calculate your answers.)

E X HI B IT 9. 1 2

MONTHLY EXCESS RETURN DATA FOR TWO PORTFOLIOS AND THREE RISK FACTORS

PPERIOD PORTFOLIO A PORTFOLIO B

1 1.08% 0.00%

FACTOR 1

FACTOR 2

FACTOR 3

0.01%

-1.01%

-1.67%

2

7.58

6.62

6.89

0.29

-1.23

3

5.03

6.01

4.75

-1.45

1.92

4

1.16

0.36

0.66

0.41

0.22

5

-1.98

-1.58

-2.95

-3.62

4.29

6

4.26

2.39

2.86

-3.40

-1.54

7

-0.75

-2.47

-2.72

-4.51

-1.79

8

-15.49

-15.46

-16.11

-5.92

5.69

9

6.05

4.06

5.95

0.02

-3.76

10

7.70

6.75

7.11

-3.36

-2.85

11

7.76

5.52

5.86

1.36

-3.68

12

9.62

4.89

5.94

-0.31

-4.95

13

5.25

2.73

3.47

1.15

-6.16

14

-3.19

-0.55

-4.15

-5.59

1.66

15

5.40

2.59

3.32

-3.82

-3.04

16

2.39

7.26

4.47

2.89

2.80

17

-2.87

0.10

-2.39

3.46

3.08

18

6.52

3.66

4.72

3.42

-4.33

19

-3.37

-0.60

-3.45

2.01

0.70

20

-1.24

-4.06

-1.35

-1.16

-1.26

21

-1.48

0.15

-2.68

3.23

-3.18

22

6.01

5.29

5.80

-6.53

-3.19

23

2.05

2.28

3.20

7.71

-8.09

24

7.20

7.09

7.83

6.98

-9.05

25

-4.81

-2.79

-4.43

4.08

-0.16

26

1.00

-2.04

2.55

21.49

-12.03

27

9.05

5.25

5.13

-16.69

7.81

28

-4.31

-2.96

-6.24

-7.53

8.59

29

-3.36

-0.63

-4.27

-5.86

5.38

30

3.86

1.80

4.67

13.31

-8.78

QUESTION

a. Using regression analysis, calculate the factor betas of each stock associated with each of the common risk factors. Which of these coefficients are statistically significant?

b. How well does the factor model explain the variation in portfolio returns? On what basis can you make an evaluation of this nature?