Reference no: EM132385337

Business Modelling and Analysis (FIN60003)

Assignment

Objectives

In this assignment you are expected to develop a business report that will be presented to a senior manager of a private investment firm. The report should be informative but concise and follows a specific structure that allows the document to be easily read and understood.

This assignment provides students with opportunity to:

• combine statistical analysis and report writing skills to prepare a concise, non-technical business report,

• draw a random sample to complete statistical analysis,

• develop and enhance computing skills, specifically the use of the built-in functions in MS Excel and MS Word,

• apply statistical techniques to a data set, and

• reinforce taught concepts including descriptive statistics, sampling and estimation, hypothesis testing, correlation and regression.

Background

Margaret is the CFO of a private investment firm in Melbourne. She has recently watched an interview with Professor Eugene F. Fama, an economic Nobel Prize winner about the portfolio management and Fama and French asset pricing models (please watch the video posted on e-tivity 7.5, In Pursuit of the Perfect Portfolio: Eugene F. Fama). After the interview, Margaret decided to further study the applications of the Fama and French Three Factor Model across several countries.

For that purpose, Margaret asked Jason, a newly appointed analyst, to perform the analysis. Margaret collected a set of data from different sources (available on e-tivitiy 7.5), passed it to Jason and asked him to conduct several analyses listed below. There are seven (7) variables in total, out of them five (5) are related the MSCI World Index, which captures the performance of large and mid-cap stocks across a number of global stock markets, and Fama and French World Index three factor model. The other two (2) variables are related to the equity market index performance and real exchange rates of 29 countries. The sample data set includes weekly data and covers the period 1996 to 2019. Definitions of variables are provided below:

• The MSCI World Index: captures net returns of large and mid-capitalization stocks across 23 Developed Markets - Source: DataStream

• Equity Market Index: the MSCI Country Market Index that captures net returns of large and mid-capitalization stocks in a country - Source: DataStream

• RM – Rf: the excess return on the market portfolio (index) - Source: Fama & French - Data Library

Tasks

Most of your statistical calculations should be carried out using Excel only and you will use Microsoft Word and Excel to complete this assignment.

1. Select a Random Sample

Select a random sample of five (5) years (almost 260 weeks) from the World Market data (including MSCI World Index and Fama & French 3 Factors) and one particular country level data (including Market Return and RER). It means that you need to choose only one of the 29 country-level data in addition to the World Market and Fama & French 3 Factors data. As a result, each student will have a different sample that includes a total of seven (7) variables. You will use this sample data to complete tasks 2 to 5.

2. Descriptive Statistics

Use appropriate data summary methods to describe the variables in your sample. For each of the variables, you need to have a graph and a table and descriptions for both. Use an appropriate graphical and/or summary statistical technique based on the type of variable. These techniques include:

Tabular Techniques: e.g. Frequency tables and Grouped (joint) frequency tables.

Graphical Techniques: e.g. Pie chart, Bar graph, Histogram (avoid three dimensional graphs).

Summary Statistics: e.g. Mode, Median, Mean, Standard Deviation, Range, Coefficient of Variation and Interquartile Range (you do not have to report all of these summary statistics. Choose the most appropriate measures based on your personal judgement).

You will need to choose the most appropriate technique(s) for each analysed variable. Less appropriate/inappropriate techniques will receive fewer/no marks.

For a nominal or an ordinal (discrete) variable, draw a graph and present a frequency table in percentages.

For a ratio or an interval variable (continuous), draw a graph and a summary statistics table. Try to use different graphs, e.g. pie chart/bar chart or histogram as much as possible for different variables. Do not draw two different graphs for the same variable.

3. Confidence intervals

Estimate the following quantities using 95% confidence intervals. Explain the meaning of your confidence intervals.

i. The average of Risk Free Rate of Return (Rf).

ii. The average of Real Exchange Rate (RER).

4. Hypothesis Testing

Margaret has some concerns about the common assumptions regarding the implications of Fame and French three-factor model. As such, she asked Jason to carry out the following hypothesis tests based on the chosen variables in his sample.

i. It has been argued that the average excess return on the market portfolio (RM – Rf) is higher than the average of Risk Free Rate of Return (Rf).

ii. It has been argued that that there is a relation between the value premium (HML) and the size premium (SMB) factors.

iii. It has been argued that that there is a relation between the excess return on the market portfolio (RM – Rf) and the size premium (SMB) factor.

Only present the main elements of your analysis and your important findings in the main section of the report. The computations and Excel outputs should be placed in an appendix.

5. Correlation and Regression

Margaret is interested in the relations between The MSCI World Index and country level variables.

Margaret asked Jason to conduct regression analyses on the following variables:

• The MSCI World Index and the country Equity Market Index.

• The MSCI World Index and the country Real Exchange Rate (RER).

Use these variables to develop two regression models and make sure to provide full discussions on each test. Use your chosen sample for these analyses. Your discussions for each test should include:

• a scattergram and full interpretation

• an estimate of the linear regression model

• the coefficients of correlation and determination

• a test of the hypothesis that there is no linear relationship between dependent and independent variables.

Attachment:- Task Details.rar