(a) 资本资产定价模型（CAPM）通常写成：
Rt Rf;t = + (RM;t Rf;t) + t;

(b) CAPM 回归是 t，其中响应变量是澳大利亚所有或
dinaries index (AORD) 回报，而回应是必和必拓股票的每日回报。

(i) 另一家矿业公司的每日回报：力拓；
(ii) 一年四季：代表一年四季的三个虚拟变量：

Tinto 是 BHP 股票回报的决定因素。如果力拓和必和必拓的回报正在

BHP 的因果因素，因为它不会在 BHP 回报已知之前发生，但是

Question 1
These questions require short answers, say up to 0.5 page, but not essays. Make your
answers as objective and concise as possible, while still fully answering the question.
(a) The Capital Asset Pricing Model (CAPM) is usually written as:
Rt Rf;t = + (RM;t Rf;t) + t;
where Rt is the asset return, Rf;t is the risk free rate of return, and RM;t is the market
return, all at time t.
Explain why the slope is said to capture \market risk”.
measures the typical change in the asset return when the market return changes
by 1 unit (e.g. 1%). Thus measures how sensitive the asset return series is to
market movements (i.e. market returns, which measure how much the market index
has moved). In particular, if > 1 then the asset return would change typically by
more than the market movements, so that if the market crashed by 10% then the asset
would typically crash by more than 10%: this indicates a high level of market risk. On
the other hand, if < 1 then the asset return would change typically by less than the
market movement, so that if the market crashed by 10% then the asset would typically
crash by less than 10%: this indicates a comparatively lower level of market risk. Thus,
is said to capture market risk.

(b) A CAPM regression is t where the response variable is the Australian All Or-
dinaries index (AORD) returns, and the response is the daily return on BHP stock.
Consider the variables:
 (i) the daily return on another mining company: Rio-Tinto;
 (ii) Season of year: three dummy variables representing the seasons of the year:
Summer, Spring, Autumn.

Discuss whether each of these two variables could cause omitted variable bias here, and
then explain why or why not (for each).
Answer (i): The CAPM already suggests that all stocks on the ASX are correlated
with the AORD market return, including Rio-Tinto (we could also test this with the
observed data via the sample correlation); thus the 2nd condition for OVB is likely
satis ed. We thus need only to answer the 1st condition for OVB: i.e. whether Rio-
Tinto is a determinant of BHP stock returns. If Rio and BHP returns are being
considered on the same day in this data set, then Rio cannot be a determinant or
causal factor for BHP, since it does not occur before the BHP return is known, but
instead occurs simultaneously with it. Causality from X to Y requires that X occurs
before Y. Here Rio-Tinto does not occur before BHP so the 1st condition for OVB is
not satis ed. Thus, Rio-Tinto, as an omitted variable, is not causing any OVB in the
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