Statistics for Business and Finance
Summer 1, 2014
This assignment is worth 20% of the total mark and should be submitted by Thursday 5pm of Week 12 (12 Feb.) using the electronic submission facility available at the LMS. No late submission is allowed. If you have experienced any difficulties with the submission, please email your assignment to your lecturer: B.Bondjakov@latrobe.edu.au
This is an individual assignment. Plagiarism will be dealt with according to the University policy.
The members of the teaching staff are NOT allowed to help you in any aspect of the project. So we will not answer any questions directly related to the project, except for those related to the clarification of the content.
Your report need not take a formal report format. You can answer each question below, with supporting Excel outputs (where applicable) included in your report. Your answers should be clear and concise: unclear and unnecessarily long answers may be penalized.
In this assignment, you will analyse stock return of an Australian stock, in comparison with the return of a market portfolio (ASX 200, ^AXJO). The main purpose of the analysis is
• to understand the mean (profit) and variance (risk) profiles of a particular stock, in comparison with those of a comprehensive and well-diversified market portfolio; and • to understand how the stock’s return is linearly related with the market portfolio return.
The following table lists the top 11 stocks of the Australian market:
Nu mber Code Name Market Weight (%)
N A CBA Commonwealth Bank 8.88
1 BHP BHP Billiton (Mining) 7.42
2 WBC Westpac Bank 7.36
3 ANZ ANZ Bank 6.28
4 NAB NAB Bank 5.63
5 TLS Telstra (Telecommunication) 4.68
6 WES Westfarmers (Retail) 3.43
7 WOW Woolworth (Retail) 3.09
8 CSL CSL (Pharmaceutical) 2.59
9 WPL Woodside Petroleum 2.25
0 RIO Rio Tinto (Mining) 1.79
You will be assigned with one stock for this assignment. It is the one with the number in the above table that matches the last digit of your student ID number. For example, if your ID number ends with 5, your stock to investigate in this assignment is TSL. The CBA stock is covered in the lecture and tutorials, so you can use the case of CBA as an example in completing this assignment.
If you are using the stock which does not match your student ID, you will get zero mark for the assignment.
Download the price data for your stock and ASX200 index from yahoo finance, monthly from 2009 and 2013. The yahoo finance can be accessed at https://au.finance.yahoo.com/. Calculate monthly holding period returns from price data using Excel. Instructions are given at the end of this document as to how you can download the price data and obtain holdingperiod returns.
For all hypothesis testing questions, state clearly the null hypothesis; alternative hypothesis; level of significance you choose; distribution you use; critical values; and decision rule.
Answer all five questions.
Question 1: [10 marks: 5 + 5]
• Calculate a range of descriptive statistics for your stock’s return and market portfolio return.
• Compare the profitability and risk of your stock with those of the market portfolio using these statistics, paying attention to the centre, variability, and the shape of the return distributions.
Question 2: [10 marks: 5 + 3+ 2]
• Test the null hypothesis that the mean of your stock return is equal to that of the market return, against an appropriate alternative hypothesis.
• State under what assumptions the test is valid.
• Based on the outcome of the test, explain whether your stock is more or less profitable than the market portfolio; or whether they are equally profitable.
Question 3: [10 marks: 2 + 2 + 4 + 2]
• Produce a scatter plot between the stock return and market return, and briefly comment on the nature of the linear relationship (direction and strength) between the two.
• Calculate and interpret the correlation coefficient.
• Test the null hypothesis that the correlation is statistically zero against an appropriate alternative hypothesis.
• State under what assumptions the test is valid.
Run the simple regression between the stock return (dependent variable) and market portfolio return (independent variable).
Question 4: [10 marks: 3 + 1 + 3 + 3]
• Explain the relationship between the two by commenting on the coefficient estimates (both intercept and slope).
• Interpret the value of R2.
• Test the null hypothesis that regression slope coefficient is equal to one, against an appropriate alternative hypothesis.
• Suppose the market return in the next month is -5%, what is the expected return of your stock?
Question 5 [10 marks]
Write a non-technical summary (no more than 100 words) of your findings.
Instructions on how to get the price data from yahoo finance
Visit Yahoo Finance (https://au.finance.yahoo.com/)
Click Get Prices, and you will see the data appear in the screen.
Go down to the bottom of the page.
You will notice that the date is in the reverse order.
We will use monthly Closing Price as a proxy for monthly price; so you may wish to delete