Exercise

# Calculating beta with CAPM

There are many ways to model stock returns, but the **Capital Asset Pricing Model**, or CAPM, is one the most well known:

$$ E(R_{P}) - RF = \beta_{{P}}(E(R_{M})-RF)\ $$

- \(E(R_{P}) - RF\): The excess expected return of a stock or portfolio P
- \(E(R_{M}) - RF\): The excess expected return of the broad market portfolio B
- \(RF\): The regional risk free-rate
- \(\beta_{{P}}\): Portfolio beta, or exposure, to the broad market portfolio B

You can call the `.fit()`

method from `statsmodels.formula.api`

on an `.ols(formula, data)`

model object to perform the analysis, and the `.summary()`

method on the analysis object to anaylze the results.

The `FamaFrenchData`

DataFrame is available in your workspace and contains the proper data for this exercise.

Instructions

**100 XP**

- First, you will need to import
`statsmodels.formula.api`

as`smf`

. - Define a regression model that explains
`Portfolio_Excess`

as a function of`Market_Excess`

. - Extract and print the adjusted r-squared of the fitted regression model.
- Extract the market beta of your portfolio.