1 P a g e Assignment 02 Which Stock Will Perform Be.docx

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Assignment 02: Which Stock Will Perform Better?
Statistics for Business and Finance (BUS5SBF) Semester
2, 2016
Submission Due Date: 21-10-2016 by 3:00PM
You have been asked by your client to recommend which of two
available stocks will perform better over time,
relative to the market. You will need to compare risk and return
relationship of the two stocks over time, and
present your findings as a written report detailing your
calculations and findings.
The goal of this assignment is to
1. acquaint you with quantitative data analysis skills often
required by different organisations
2. estimate the Capital Asset Pricing Model (CAPM)
3. provide you with feedback on your ability to carry out such
tasks
4. learn how and when to use different quantitative techniques
covered in the second half of this course.

IMPORTANT INSTRUCTIONS:
a. This is an individual assignment of worth 100 marks and
contributes 15% to the total assessment in this
subject.
b. Please submit this assignment online using Assignment
Submission Tool on LMS.
c. Late submissions as per policy: For more information, visit
http://www.latrobe.edu.au/policy/documents/late-submission-of-
assessment-tasks-policy.pdf
d. Plagiarism (as per University policy): For more information,
visit
http://www.latrobe.edu.au/students/academic-
integrity/explanation
e. Please do not copy your data set or assignment questions on
the word files you are submitting since this
will trigger plagiarism detection and might affect your
submission. Please submit your data set as an
attachment in a separate excel document.

http://www.latrobe.edu.au/policy/documents/late-submission-of-
assessment-tasks-policy.pdf
http://www.latrobe.edu.au/students/academic-
integrity/explanation
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Data Analyses & Report Submission
Prepare your written report by taking into account the following
points:
r different parts of Tasks 1 and
2 below
of hypothesis testing
that your client can understand. For
example, what conclusions can you draw from each of your
findings after performing above tasks.
in total, including all appendices, graphs,
tables, references and written answers.
graphs or numerical measures, undertake

inappropriate tests or discuss irrelevant matters.
There are two main tasks involved in this assignment.
Task 1: Comparison of stock returns
Task 2: Estimation of CAPM and Hypothesis Testing
Variables and Data Sources:
This is Standard and Poor index of 500 companies and will be
used as market portfolio.
http://finance.yahoo.com/quote/SPY/
A particular stock we are interested in to determine how it
behaves in response to market changes.
http://finance.yahoo.com/quote/IBM/
A particular stock we are interested in to determine how it
behaves in response to market changes.
http://finance.yahoo.com/quote/GE/
-Treasury Note
This variable will serve as a risk-free interest rate. We will use
this variable to compute excess returns of
IBM and GE and Market excess returns.

http://finance.yahoo.com/quote/%5ETNX/
Downloading the Data (10 Marks)
Download monthly data for S&P 500 index, International
Business Machines (IBM) Stock Price, General
Electric (GE) Stock Price, and US TN (10 year) by clicking the
above links and choosing Historical Data for all
variables covering the period based on the following criterion.
http://finance.yahoo.com/quote/SPY/
http://finance.yahoo.com/quote/IBM/
http://finance.yahoo.com/quote/GE/
http://finance.yahoo.com/quote/%5ETNX/
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Sample Period Selection Criterion
You will pick data window based on the last digit of your
Student ID.
For example, your ID is 10328048, so your selected sample
should cover the period Jan 2010-Dec 2014
only. Not following this instruction means you will lose all
marks on this assignment.

Last digit of
student ID
Sample/Data Window
0 your data set will be from the period of: Jan. 2002 – Dec.
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015

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Task 1: Comparison of Stock Returns (50
Marks)
1. Obtain the line charts for S&P, IBM and GE series (prices)
and comment on your observations. (6 marks)
2.
(3+6+3+2 = 14 marks)
a. Now obtain returns for these three series (ignoring any of the
dividends paid) using the
ttt
PPr .
b. Obtain the summary statistics together with their histograms
to further analyse each of the
three returns distributions. 1

c. Interpret your results. In particular, explain risk and average
return relationship.
d. Based on your statistics, is IBM relatively riskier than the GE
stock?
3. Suppose you are not convinced with your finding about
riskiness of the two stocks based on your
estimates for sample standard deviations and, therefore, you
want to test hypothesis whether both
returns are equally volatile (
22
0
:
GEIBM
Perform an appropriate hypothesis test using 5% significance
level and provide all the steps involved.
What do you conclude about returns volatility in this case?
(10 marks)
4. Before investing in one of the two stocks based on higher
risk, you further want to determine whether
both stocks have same population average return.
Perform an appropriate hypothesis test given the sample and
report your findings. Which stock will you

prefer and why? (10 marks)
5. Draw the scatter plot of each of the two returns series against
market return. Also, compute the sample
covariance and sample correlation between these two stocks and
explain your findings. (10 marks)
1 Monthly return for August 2016 will be calculated as r2016 =
100[ln(PAugust2016)-ln(PJuly2016)] %
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Task 2: Estimation of CAPM and Hypothesis Testing (40
Marks)
6. Now compute excess return on your preferred stock and
excess market return by subtracting the 10-
year T-Bill rate from both series. That is,
(5 marks)
. :marketon return Excess
:stock preferredon return Excess

,,
,
tftMt
tftt
rrx
rry
Capital Asset Pricing Model
(See last page for more details on CAPM taken from The Basics
of Financial Econometrics by
Fabozzi et al. (2014))
Ttuxy
or
urrrr

ttt
ttftMtft
,...,2,1,
10
,,10,
7. a. Estimate the CAPM and report your results.
(4+4+2=10 marks)
b. Interpret the estimated coefficients in relation to the
profitability of the Stock and its riskiness in
comparison with the market.
c. Interpret the value of R2.
8. Perform the hypothesis test to determine whether your
preferred stock is aggressive (a stock is an
aggressive stock if the slope coefficient is greater than 1 and is
defensive stock if the slope coefficient is

less than 1).
(10 marks)
9. Construct 95% confidence interval for the slope coefficient.
(5 marks)
10. Estimate AR (1) model (that is, AutoRegressive model of
order 1) using either GE stock price or IBM
stock price. Report and interpret your result.
(10 marks)
End of the Assignment Questions
6 | P a g e
Estimating the CAPM for Mutual Funds (Fabozzi (2014), p.25)
GOOD LUCK!

1 P a g e Assignment 02 Which Stock Will Perform Be.docx

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