FIN 4113 Investments and Derivatives Group Project

Assignment 1

Pick three stocks of your choice (Select stocks listed in the USA or UK Stock Exchange), from different industry groups. Go to the recommended websites or any other website that offers historical stock price data or to published information sources such as Yahoo Finance

(https://finance.yahoo.com/quote/%5EDJI/components?p=%5EDJI).

Extract every day’s closing share prices within the time period July 1st 2019 to June 30th, 2020. Also extract the values of the stock market index, (represented by Dow Jones Industrial Average Index or FTSE-100 Index ), on a daily basis over the same time period.

Required

Part 1

The rate of return in each day for each stock and for the stock market index for the sample period. Calculate the discrete rate of return. Calculate the arithmetic mean return and the geometric mean return of each stock for the entire period. Use only the discrete returns for your calculations and for the calculations in the questions that follow.

(10 Marks)

The variance of returns for each stock and the index and the covariances of returns between each pair of stocks, the covariance between each stock and the stock market index, and the corresponding correlation coefficients.

(5 Marks)

Compare your results in (a) and (b) for each stock and the stock market index and comment on the risk return characteristics and performance of each of your stocks and the index. Illustrate with tables/charts as appropriate. Comment on the results, relating to what you have learnt in this course. Relate the risk return pattern and the performance of the market index and your stocks to relevant events that took place during this period. Draw on economic, political, industry and company related events that took place over this period that may have impacted on the performance of your stocks and the market index. Give bibliographic references to the sources of your information.

(15 Marks)

Part 2

(a) Based on the discrete returns calculations in Part 1, compute the daily rate of return and the variance of an equally weighted portfolio formed from the three stocks. Make use of your knowledge of matrix algebra in your calculations.

(5 Marks)

(b). Examine and compare the pattern of the returns of your portfolio with those of the individual stocks, and the stock index. Compare the corresponding variances. Comment on your observations, relating to material learnt in this course. (5 marks)

Part 3

Extract for each day, the yield of the 13-week Treasury bill (or equivalently the 90 day or 180-day bank accepted bill from the following source:

https://www.treasury.gov/resource-center/data-chart-center/interest- rates/pages/TextView.aspx?data=billRatesYear&year=2020 over your sample period. (Remember sometimes reported yields are usually annualised figures. Use these as a proxy for the risk free rate).

(5 Marks)

Estimate the Security Characteristic Line (SCL) for each of your stocks and the equal weighted portfolio, based on the ‘Market Model’, using excess returns (discrete returns less the risk free rate), using Excel regression analysis functions. Show your results graphically. From your results, compute the Beta and the Jensen’s Alpha of each stock and the portfolio.

(10 Marks)

Calculate the total risk (the return variance) of each stock and the portfolio. Partition the total risk to their respective systematic and unsystematic risk components.

[10 Marks]

Extend your calculation of the Jensen’s alpha in (b) by using Fama-French 3 factor models. Data for the size and book-to-market ratio should be obtained by students themselves from the following link (https://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html).

Compare your extended results in (d) with (b), and comment on it.

[10 Marks]

(d) Based on your observations and results in parts (b), (c) and (d) above, comment on each of your stock's and portfolio's performance, and on their risk characteristics, comparing and contrasting the magnitude and the proportions of their systematic and unsystematic risk components. What further insights can you gain on the characteristics and behaviour of your stocks and portfolio compared to the analysis and observations you made in Part 1 (c) and Part 2 (b)?