FINANCIAL MODELLING

| March 4, 2014

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The assignment
(1)
Collect monthly UK price data for two equities, each from a different industry, and
one market index from UK Yahoo Financ
e (http://uk.finance.yahoo.com/). You
should select stocks that have at least 10 years of recent data and the most recent
observation should be January 2014. Note that any two submissions should not
consider precisely the same set of data. Also, you should not choose stocks that were
used in the lectures/classes (in particular, Barclays and Tesco)
(2)Download the sterling end-of-month 3-month UK Treasury bill data (code
IUMAJNB) for the same sample period
from the Bank of England website.
(3)Convert each (adjusted closing) price data series into log returns. Convert the raw 3-
month Treasury bill rates into monthly figures and lag the data by one month.
Construct a table providing relevant descriptive statistics for these data and provide a
brief description.
[25 marks for (1), (2) and (3)]
(4)Estimate the CAPM regression for each stock. Report your regression results. (Decide
what you think is most relevant and do not copy and paste Excel output
.) Briefly
comment on the output.
[20 marks]
(5)
Comment on whether there is support for the CAPM in each case.
[5 marks]
(6)
Determine the type (whether aggressive, defensive, or neutral) for each of your
stocks. Use statistical hypothesis tests to support your classification.
[20 marks]
(7)
Calculate the expected return, systematic risk, non-systematic risk and total risk for
each stock implied by the market model. Briefly comment on the results.
[15 marks]
(8)
Suppose you want to test the possibility that the returns of your chosen stocks behave
differently in January compared to other months of the year. Create a dummy variable
that would distinguish between the month of January and other months. Re-estimate
the CAPM regression for each stock, but th
is time including the (intercept) dummy as
an additional regressor. Report your results and comment on your findings by
focusing on the results for the intercept dummy in each case.
[15 marks]
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