Ac.F 101
Group Work
Lent 2024
Submission Deadline: 22/04/2024 (12 Noon)
You are expected to analyse 5 companies and the market index. (More information on the data is on the following page). Prepare a report that includes outcomes of the following tasks:
1. Compute descriptive statistics for each of the 5 stocks you have chosen and the market index. Comment on you results. Which stocks are the most volatile? (20 marks)
2. Plot the returns on each stock against returns on index (do as a separate scatter plot for each stock) and compute the correlation between the return on each stock and the return on the market. (10 marks)
One measure of the risk or volatility of an individual stock is the standard deviation of the total return (capital appreciation plus dividends) over several periods of time. Although the standard deviation is easy to compute, it does not take into account the extent to which the price of a given stock varies as a function of a standard market index, such as the S&P 500. As a result, many financial analysts prefer to use another measure of risk referred to as beta.
Betas for individual stocks are determined by simple linear regression. The dependent variable is the total return for the stock and the independent variable is the total return for the stocks market. Higher the beta of a stock, greater is its market risk. Betas greater than 1 indicate that the stock is more volatile than the market, or that the stock is a volatile investment whose price movements are highly correlated with the market.
3. Compute the value of beta for each stock. Which stocks have the most market risk? Ensure to interpret your results from the regression, including the t-stats/p-values associated with the intercept and the beta estimates. (20 marks)
4. Comment on how much of the return for the individual stocks is explained by the market. (10 marks)
5. An analyst is interested in testing the hypotheses that stocks betas are significantly higher on days when the absolute value of market return is greater than 1%.
a. Write the regression equation you would employ to test the analyst’s hypothesis. (25 marks)
b. Choose any one of your 5 stocks to test the analyst’s hypothesis and interpret the results of the regression analysis, including the t-stats/p-values associated with the intercept and the beta estimates. (15 marks)
Data
Get price series for the market index (S&P500) and 5 stocks for 1 year – pick 5 companies you are interested in – from the data spreadsheet (AcF101_data.xlsx).
The excel file has two worksheets.
The worksheet titled “StocksDaily” provides daily data for 2021 on 200 large companies listed in the US. Choose any 5 you want to analyse.
The worksheet titled “SnP500Daily” provides daily return data for 2021 on the S&P500 index.