Paper should be about 10 – 14 pages long (double spaced).
Provide Graphs, tables, calculations, spreadsheets, etc. as attachments to the
paper as needed.
? Paper must demonstrate at least one of the approaches to
data analysis that we discussed in class: o Inference about the means in two
populations o Inference about the proportions in two populations o Chi-Square
Goodness of Fit Test o Chi-Square Test for Independence o Nonparametric Methods
o Simple or Multiple Linear Regression o Time Series Analysis and Forecasting o
Statistical Methods for Quality Control o Decision Analysis
? Paper should follow APA style guidelines to include citing
all references
? Paper should
address the following components (if applicable): o Title Page o Table of
Contents o Introduction o Problem statement o Brief background discussion
related to the topic and purpose of the study o Assumptions o Data collection
plan o Test design/approach (method) o Results of data
analysis/testing/discussion o Conclusions/Recommendations o Reference
I uploaded all data and charts needed in excel. Case Problem 1 Measuring Stock Market Risk (You can use Minitab)
One measure of the risk or volatility of an individual stock is the standard deviation of the total return (capital appreciation plus dividends) over several periods of time. Although the standard deviation is easy to compute, it does not take into account the extent to which the price of a given stock varies as a function of a standard market index, such as the S&P 500. As a result, many financial analysts prefer to use another measure of risk referred to as beta. Betas for individual stocks are determined by simple linear regression. The dependent variable is the total return for the stock and the independent variable is the total return for the stock market. For this case problem we will use the S&P 500 index as the measure of the total return for the stock market, and an estimated regression equation will be developed using monthly data. The beta for the stock is the slope of the estimated regression equation The value of beta for the stock market will always be 1; thus, stocks that tend to rise and fall with the stock market will also have a beta close to 1. Betas greater than 1 indicate that the stock is more volatile than the market, and betas less than 1 indicate that the stock is less volatile than the market. For instance, if a stock has a beta of 1.4, it is 40% more volatile than the market, and if a stock has a beta of .4, it is 60% less volatile than the market.
Managerial Report You have been assigned to analyze the risk characteristics of these stocks. Prepare a report that includes but is not limited to the following items.
a.Compute descriptive statistics for each stock and the S&P 500. Comment on your results. Which stocks are the most volatile?
b. Compute the value of beta for each stock. Which of these stocks would you expect to perform best in an up market? Which would you expect to hold their value best in a down market?
c. Comment on how much of the return for the individual stocks is explained by the market.
QUMT 6303 Case Study ? Measuring Stock Market Risk
One measure of the risk or volatility of an individual stock is the standard deviation of the total return (capital appreciation plus dividends) over several periods of time. Although the standard deviation is easy to compute, it does not take into account the extent to which the price of a given stock varies as a function of a standard market index, such as the S&P 500.
As a result, many financial analysts prefer to use another measure of risk referred to as beta. Betas for individual stocks are determined by simple linear regression. The dependent variable is the total return for the stock and the independent variable is the total return for the stock market. For this case problem we will use the S&P 500 index as the measure of the total return for the stock market, and an estimated regression equation will be developed using monthly data. The beta for the stock is the slope of the estimated regression equation (b1). The data contained in the file named Beta provides the total return (capital appreciation plus dividends) over 36 months for eight widely traded common stocks and the S&P 500.
The value of beta for the stock market will always be 1; thus, stocks that tend to rise and fall with the stock market will also have a beta close to 1. Betas greater than 1 indicate that the stock is more volatile than the market, and betas less than 1 indicate that the stock is less volatile than the market. For instance, if a stock has a beta of 1.4, it is 40% more volatile than the market, and if a stock has a beta of .4, it is 60% less volatile than the market.
Managerial Report
You have been assigned to analyze the risk characteristics of these stocks. Prepare a report that includes but is not limited to the following items.
A (30 points). Compute descriptive statistics for each stock and the S&P 500. Comment on your results. Which stocks are the most volatile?
B (30 points). Compute the value of beta for each stock. Which of these stocks would you expect to perform best in an up market? Which would you expect to hold their value best in a down market?
C (40 points). Comment on how much of the return for the individual stocks is explained by the market.
Standard Devitation 4.54% 5.53% 6.86% 3.49% 6.81% 19.54% 8.62% 3.71% 2.63%
Beta 0.46 0.73 1.49 0.01 1.50 2.60 1.41 0.51 1.00
RSQ 7.08% 12.09% 32.88% 0.0044% 33.78% 12.32% 18.66% 12.95% 100.00%
Correlation 0.27 0.35 0.57 0.01 0.58 0.35 0.43 0.36 1.00
Standard Deviation can be caluculated using the STDEV function of excel.
Beta = Covariance (Stock, Market) / Variance(Market)
A) Volatility can be measured using the standard deviation measure which is a measure of deviation from the mean. Sandisk is the most volatile stock with a standard deviation of 19.54% followed by Qualcomm with a standard deviation of 8.62%. Johnson and Johnson is the least volaitle stock with a standard deviation of 3.49% followed by Proctor and Gamble with a standard deviation of 3.71%.
Systematic Risk or Market Risk is measured by the Beta Measure. The stock with the highest systematic risk is also Sandisk with a Beta of 2.6 and the stock with the lowest systematic risk is Johnson and Johnson with a Beta of 0.01.
B) Value of Beta of each stock is calculated and is there in the table above. In an upmarket, the best performance is expected out of Sandisk because it has the highest beta (2.6). Beta is a measure of the sensitivity of the stock to the market. Thus, Sandisk is the most sensitive stock with respect to the market and is expected to perform best in an upmarket.
In a down market, it is expected that Johnson and Johnson would hold its value best as it has the lowest beta of 0.01 and thus, has extremely low sensitivity with respect to the market.
C) The return for the individual stocks explained by the market can be calculated using the R2?measure. It is calculated using the RSQ function of excel. The values have been calculated in the table above.Using the values of R sqaured, it can be concluded that 33.78% of the return on Mcdonalds stock is explained by the market.Similarly 32.88% of the return on the Caterpillar stock is explained by the market and 18.66% of the return on the Qualcomm stock is explained by the market . Similarly from the table, return for the individual stocks explained by the market can be concluded/interpreted. The return on the Johnson and Johnson stock is the least explained by the market (almost negligible) as the R squared value is 0.0044%.
It can also be seen using the correlation of stocks with respect to the market that the Mcdonalds stock is the highest correlated with the market with a correlation coefficient of 0.58 followed by Caterpillar with a correlation coefficient of 0.57. Also, correlation of Johnson and Johnson with the market is the least with a correlation coefficient of 0.01.
