Reference no: EM132311057

Assignment -

You have been asked by your client to recommend which of two available stocks will perform better over time, relative to risk. You will need to compare the risk and return relationship of the two stocks over time and present your findings as a formal written report (detailing your calculations and findings).

The goal of this assignment is to

1. give you practice in performing the different types of quantitative analysis tasks often undertaken by Business graduates,

2. provide you with feedback on your ability to carry out such tasks, and

3. learn how and when to use different quantitative techniques covered in the last six (6) modules of the subject.

Now perform the following tasks.

Task A: Downloading the data

Download the data for S&P 500 index, Boeing Stock Price, General Dynamics Corp. Stock Price, and US TN (10 Year), using the links provided above and choosing Monthly Historical Data for all variables covering the period related to a group your Student ID belongs to.

Task B: Hypothesis Testing of Means and Variances Equality

1. Returns computation Calculate returns for these three series in Excel or any software of your choice using the transformation: rt = 100*ln(Pt / Pt-1) and perform the Jarque-Berra test of normally distributed returns for each of Boeing and GD stocks. What do you infer about the distribution of the two stock returns series? Specify the sampling distribution of the average returns of the two stocks.
Hints:
o We have computed stock returns in Workshop 02.
o If there are say "n+1" observations on prices, then the return series would have "n" observations.
o These numbers would represent percentages after multiplication with 100 in the formula above. But you would not include a percentage sign in your data. For example, returns for two periods are 0.35% and 0.41% but we would use 0.35 and 0.41 after omitting % sign in our excel worksheet.

2. Hypothesis testing of a single population mean (µ): Test a hypothesis that the average return on GD stock is different from 2.8%. Which test statistic would you choose to perform this hypothesis test and why? Also, specify the distribution of the test statistic under the null hypothesis, using a 5% significance level.

3. Hypothesis testing of homoskedasticity: Before investing in one of the two stocks, you first want to compare the risk associated with each of the two stocks. Perform an appropriate hypothesis test using a 5% significance level and interpret your results.

4. Hypothesis testing of two population means: Besides, you want to determine whether both stocks have the same population average return. Using the confidence interval approach, perform an appropriate hypothesis test given the information in your sample of 60 observations on returns at a 5% significance level. Report your findings and also mention which stock will you prefer and why? Note: You will not be given marks if you do not follow the confidence interval approach to test the hypothesis

Task C: Regression Analysis and Inference

5. Compute excess return on your preferred stock as yt = rt - rf,t and excess market return as xt = rM,t - rf,t and perform the following tasks.

a. Estimate the Capital Asset Pricing Model (Use the link below for the CAPM details) by regressing the excess return on your preferred stock (yt) on excess market return (xt) and properly report your regression results.
b. Interpret the estimated CAPM beta-coefficient in terms of the stock's riskiness in comparison with the market.
c. Interpret the value of R2.
d. Interpret a 95% confidence interval (CI) for the slope coefficient.

6. Perform a hypothesis test to infer whether your preferred stock is an aggressive stock.

7. One of the assumptions of the linear regression model is: Random errors are normally distributed. Perform an appropriate hypothesis test to determine whether it is plausible to assume normally distributed errors.

Analyse Data & Submit Report

Prepare your written report in two Parts:

Part A: Calculations
• Set out all your calculations for each of the tasks (listed above) using Data Analysis Tool in Excel. Present your results in graphs and charts as appropriate in the report to be submitted in a pdf file.

Part B: Interpretation
- Explain what your results mean, in language that your client can understand. For example, what conclusions can you draw from each of your findings?
- Your written report must be no more than TWELVE (12) pages in total, including all appendices, graphs, tables, and written answers. Answer the questions directly. Do not present unnecessary graphs or numerical measures, undertake inappropriate tests or discuss irrelevant matters.

Attachment:- Assignment Guideline.rar