Sample Question #101 (financial econometrics)
You say you know CAPM. How do people test it?
(Comment: this terse question probes how much you really know CAPM beyond its equation)
The easiest test is just to regress stock excess returns on market excess returns, accounting for heteroskedasticity. The interesting questions are: 1) what market factor should you use, 2) what time period should you run the test for, and 3) what do the results really tell us. #3 is actually the most fascinating aspect of testing models like CAPM and APT, because result interpretations have generated endless debates among economists.
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