Question
The spreadsheet contains daily returns on 10 different stocks and the S&P/ASX200. The S&P/ASX200 is a proxy for the market portfolio. The daily returns are
The spreadsheet contains daily returns on 10 different stocks and the S&P/ASX200. The S&P/ASX200 is a proxy for the market portfolio. The daily returns are total returns and incorporate price changes and dividend payments. As the annual risk-free rate is very close to zero and you are using daily data, we can assume that the daily risk-free rate is zero.
You are required to pick one stock from Group 1 and one stock from Group Bto use in this question. You cannot pick two stocks from the same group.
Group 1 | Group 2 |
NextDC Limited (NXT) | Flight Centre Travel Group Ltd (FLT) |
Evolution Mining Ltd (EVN) | Santos Ltd (STO) |
Saracen Mineral Holdings Ltd (SAR) | Macquarie Group Ltd (MQG) |
Domino's Pizza Enterprises Ltd (DMP) | Scentre Group (SCG) |
ASX Limited (ASX.AX) | Downer EDI Limited (DOW) |
Using the two stocks you have chosen you need to conduct separate analysis for 2019 and 2020 to better understand risk and return.Throughout the assessment, you need to link your calculations to what has been happening in financial markets.
1a) The Single Index Model (30 marks)
- Estimate the Single Index Model for each stock separately for 2019 and 2020 using Excel. You will need to estimate four regressions in total (2 stocks x 2 years).
- Discuss the differences in beta between the two stocks in 2019 and 2020. What explains the differences?
- Discuss the change in beta from 2019 to 2020 for each stock.What explains the differences?
- How has total risk, systematic risk and idiosyncratic risk changed for each stock? What do you think has caused these changes for the two stocks?
- Did the alpha and beta estimates from 2019 provide a reasonable prediction of stock returns in 2020 for the two stocks you are analysing? Why or why not?
- Your discussion of the abovepoints needs to incorporate relevant qualitative information on the two stocks from your own research.
1b) Multifactor models, such as the Fama-French 3-factor model, are used extensively in finance. Do you think a multifactor model would help improve your results in part 1a? Why or why not? (10 marks)
1c) Perform an Event Study on your two stocks selected between 2/3/2020 and 1/6/20. What can you infer about the efficiency of financial markets from the stock return behaviour?
(20 marks)
1d) Using the data from 2019 only, which of the two stocks that you selected would you invest in if you were adding it to an investment in an Australia market index fund (S&P/ASX200). Why?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started