I need !!

Each member works as a Financial Analyst. In this project you are required to utilize

the market model in analyzing individual stock risk. (Total Marks: 72)

a) The Stock Price Data Sample on Canvas contains 401 stocks for 121 recent consecutive

months from Dec 31, 2013 to Dec 31, 2023 (so that you will end up with 120 monthly

returns). Ignore dividends. Make sure that the stocks you picked have a good spread of

annualized returns in the range of 5-30 percent. Choose a number of stocks (the number

of stocks is the number of students in the group), such that the ticker symbol of each

stock begins with the same letter as the last name or first name of each group member. If

you do not find enough stocks using this criterion, then choose stocks such that the ticker

symbol begins with the same letter as the second letter in the members last name or first

name, and so on. Students in one group cannot pick the same stock. (5)

b) For each stock, report its SIC Code (SICCD). According to the U.S. SEC website of SIC

Code list (https://www.sec.gov/search-filings/standard-industrial-classification-sic-

code-list), describe the industry that the company belongs to. (5)

c) For each stock, estimate 120 monthly returns from January 2014 to December 2023.

Calculate the total risk, measured by volatility (standard deviation) of each stock. (5)

d) Obtain the market factor and risk-free return data from the Stock Price Data Sample Excel

file. Copy the market factor data next to each stocks return. (2)

e) For each stock, estimate its excess return in percentage. Excess return is the spread

between stock return and the risk-free return. (5)

f) For each stock, provide a scatter plot of stock excess return and the market factor. Based

on your own judgment(s), does the market factor seem to explain individual stock

returns? (5)

g) For each stock, provide a histogram of monthly stock returns. By your own judgement(s),

is stock return normally distributed? (5)

h) Estimate the market model in the form of CAPM. For each stock, report the beta. For

each stock, is beta statistically significant at the 5% level? What are two hypotheses in

testing the significance of beta? What test do we use to examine the significance? (15)

i) What stocks are riskier than the market index, and what stocks are safer than the market

index? Please provide your reason(s). (5)

j) For each stock, report the goodness-of-fit measure as R-squared. Please use your own

words to interpret the reported number. (10)

k) If one expects the stock market yields a 5% return, according to your regression results,

what are individual stock returns of all selected stocks? (5)

l) Compare the risk-adjusted fund performance (measured by alpha) for every stock using

the CAPM as a benchmark. Based on your subjective idea(s), which stock is potentially

the best investment according to its alpha? (5)

m) The efficient market hypothesis states that investors are rational, and in turn, stock returns

are not predictable. As a result, stock return is a random walk and assumed to be normally

distributed. Please check the normality of the regression errors (residuals). Based on your

own judgement(s), is regression error term normally distributed? Does it support the

efficient market hypothesis? (5)

Comments