Pick three stocks of your choice (Select stocks listed in the ASX or
any other national Exchange), preferably from different industry groups.
Go to the recommended websites or any other website that offers
historical stock price data or to published information sources such as
Yahoo Finance, or any other source of financial information. Extract
weekly (for example, every Friday) closing share prices for themost recent 28 weeks
Extract
also the values of the stock market index, (represented by the ASX 300
or ASX 200 Index in the case of Australia), on a weekly basis over the
same time period.
Calculate the following:
Part 1 (30 marks)
(a)
The rate of return in each week for each stock and for the stock market
index for the 27 weekly periods. Calculate the discrete rate of return
as well as the continuously compounded rate of return. Calculate the
arithmetic mean return and the geometric mean return of each stock for
the entire period. Use only the discrete returns for your calculations
and for the calculations in the questions that follow. (10 marks)
(b)
The variance of returns for each stock and the index and the
covariances of returns between each pair of stocks, the covariance
between each stock and the stock market index, and the corresponding
correlation coefficients. (5 marks)
(c) Compare your results in
(a) and (b) for each stock and the stock market index and comment on the
risk return characteristics and performance of each of your stocks and
the index. Illustrate with tables/charts as appropriate. Comment on the
results, relating to what you have learnt in this course. Relate the
risk return pattern and the performance of the market index and your
stocks to relevant events that took place during this period. Draw on
economic, political, industry and company related events that took place
over this period that may have impacted on the performance of your
stocks and the market index. Give bibliographic references to the
sources of your information. http://www.rba.gov.au/statistics/tables/index.html#interest_rates)
over your sample period. (Remember that reported yields are usually
annualised figures.) Convert the yields to weekly numbers. Use these as a
proxy for the risk free rate.
(5 marks)
(b) Estimate the
Security Characteristic Line (SCL) for each of your stocks and the equal
weighted portfolio, based on the ‘Market Model’, using excess returns
(discrete returns less the risk free rate), using Excel regression analysis functions.
Show your results graphically. From your results, compute the Beta and
the Jensen’s Alpha of each stock and the portfolio. (15 marks)
(c)
Calculate the total risk (the return variance) of each stock and the
portfolio. Partition the total risk to their respective systematic and
unsystematic risk components. (10 marks)
(d) Based on your
observations and results in parts (b) and (c) above, comment on each of
your stock’s and portfolio’s performance, and on their risk
characteristics, comparing and contrasting the magnitude and the
proportions of their systematic and unsystematic risk components. What
further insights can you gain on the characteristics and behaviour of
your stocks and portfolio compared to the analysis and observations you
made in Part 1 (c) and Part 2 (b)? (15 marks)
Part 4 (15 marks)
From
the point of view of an investor who wishes to evaluate whether the
stocks that you examined are worth investing in, how useful was the
analysis you carried out on these stocks? What limitations do you see in
your analysis and results for investment decision making purposes? What
further analysis would you wish to carry out? Explain briefly.
__________________________________________________________________________________
Examples of websites for sourcing data
Australian Stock Exchange:
http://www.asx.com.au/asx/statistics/indexInfo.jsp
BARRA indexes:
http://www.barra.com/research/download_returns.asp
Morgan Stanley Indexes:
For individual stock data:
Reserve Bank of Australia – for interest rates, exchange rates etc.
http://www.rba.gov.au/Statistics/
use chicago references where possible
Instructions
1. You
are expected to make this assignment an opportunity to develop you
spreadsheet computational skills. Make use of Excel or any other
computer spreadsheet of your choice to do your calculations and graphs.
2.
Assignments must be typed and neatly presented in a professional report
format. The results or summaries of your calculation and your comments
must be shown in the body of the report. Make sure the formulas or methods used
for your computations are clearly shown. The data collected and details
of calculations can be shown as appendices to the report. Make your
report look professional and reader friendly. The length of the report should not exceed 10 pages (Excluding the appendix). Use 12 point font size and standard margins.
6.
Ensure that you give adequate cross references to the sources from
which you have gathered data or information in compiling your report.
7. The criteria used in assessing your marks on this assignment will include:
Computational accuracy,
Relevance and accuracy of the interpretation of results,
Demonstration of your understanding of the underlying theory,
Neatness and style of presentation
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