Which Stock Will Perform Better?
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
- acquaint you with quantitative data analysis skills often required by different organisations
- estimate the Capital Asset Pricing Model (CAPM)
- provide you with feedback on your ability to carry out such tasks
- learn how and when to use different quantitative techniques covered in the second half of this course.
Data Analyses & Report Submission
Prepare your written report by taking into account the following points:
- Set out all your calculations for different parts of Tasks 1 and 2 below
- Present your results in graphs and charts as appropriate
- Provide all necessary steps involved, for example, five steps of hypothesis testing
- Explain what your results means to you, in a layman language that your client can understand. For example, what conclusions can you draw from each of your findings after performing above tasks.
- Your written report must be no more than Twelve (12) pages in total, including all appendices, graphs, tables, references and written answers.
- Answer the questions directly. Do not present unnecessary 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:
- PS&P = S&P 500 Price Index: This is Standard and Poor index of 500 companies and will be used as market portfolio. http://finance.yahoo.com/quote/SPY/
- PIBM = International Business Machines Stock Price: A particular stock we are interested in to determine how it behaves in response to market changes. http://finance.yahoo.com/quote/IBM/
- PGM = General Electric Stock Price: A particular stock we are interested in to determine how it behaves in response to market changes. http://finance.yahoo.com/quote/GE/
- rf =Interest rate on 10 year US-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/