FIN 4113 Investments and Derivatives Group Project
This is a Group Project – to be completed by between 2 – 3 Group Members (Not More). The Group Project is divided into two (2) Sections: A and B, with the following weighted marks:
- Group Project Report: Data Mining / Analysis / Interpretation [Yahoo Finance Platform]
- Individual Component: [Bloomberg Markets Certificates Platform]
[TOTAL: 100 Marks]
These two components must be submitted at the same time as part of the Group Project Assessment.
Section A: Yahoo Finance / Down Jones Index / S&P 500 / FTSE- 100: Data Mining / Analysis / Interpretation
In doing this assignment, you are encouraged to refer to the texts, the reading material in Blackboard and any other material that may assist you in understanding what you are doing in this project. You are expected to make this assignment an opportunity to develop you spreadsheet computational skills. Make use of Excel or any other computer spreadsheet of your choice to do your calculations and graphs.
Assignments must be typed and neatly presented in a professional report format. The results or summaries of your calculation and your comments must be shown in the body of the report. Make sure the formulas or methods used for your computations are clearly shown and explained. The data collected and details of calculations can be shown as appendices to the report. Make your report look professional and reader friendly (Neatness and style of presentation). The length of the report should not exceed 3,000 words (Excluding the appendix). Use 12 point font size and standard margins.
- Ensure that you give adequate cross references to the sources from which you have gathered data or information in compiling your report.
Note in assessing your marks on this assignment the following criteria will be used:
- Clearly identify issues in business case.
- Apply appropriate practices, principles, theories and computation accuracy to resolve complex issues in business case.
- Relevance and accuracy of analysis and results interpretation.
- Application of other perspective and identify limitation of result analysis.
- Conclusions are comprehensive, significant and well supported. Clearpresentation, neatness and well-organised.
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
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.
- 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.
- 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.
- 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.
(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.
(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)
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).
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.
- 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.
- 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 follow(LINK WILL BE PROVIDED).
Compare your extended results in (d) with (b), and comment on it.
(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)?
For this project report, write a 3,000 word analysis and portfolio management report. You are permitted a 10% leeway word-count either way.
Your report must be formatted such that:
- It is 1.5-spaced
- Uses APA referencing / citation
- Times New Roman Size 12 Font.
- Each paragraph must be between 6 – 8 lines
- All paragraphs must be justify-formatted
- Using Sources
You may refer to the course material for supporting evidence, but you must also use at least 10 sources and cite them using APA format. Please include a mix of both primary and secondary sources, with at least 10 sources from a scholarly peer-reviewed journal. Primary sources are first-hand accounts such as interviews, advertisements, speeches, company documents, statements, and press releases published by the company in question. Secondary sources come from peer-reviewed scholarly journals, such as the Journal of Finance. You may use sources like JSTOR, Google Scholar, and OMICS International to find articles from these journals. Secondary sources may also come from reputable websites with a .gov, .edu, or .org domain. Please note that Wikipedia is not an academically credible source.
Indicative Reading / Useful References:
- Investments, by Z. Bodie, A. Kane, and A. Marcus, McGraw-Hill Irwin
- Modern portfolio theory and investment analysis, by E. J. Elton, M. J.Gruber, S. J. Brown, and W. N. Goetzmann, Wiley Press;
- Modern investment management, by Bob Litterman and the Quantitative Resource Group, GSAM, Wiley Press
- Ibbotson, R G and Kaplan P D (2000) “Does Asset Allocation Policy Explain 40, 90, 100 Percent of Performance?” Financial Analysts Journal, 56, January / February, 2000
- Brinson, Gary P., L. Randolph Hood, and Gilbert L. Beebower.1986. “Determinants of Portfolio Performance.” Financial Analysts Journal, vol. 42, no. 4 (July/August):39–48.
- Brinson, Gary P., Brian D. Singer, and Gilbert L. Beebower. 1991. “Determinants of Portfolio Performance II: An Update.” Financial Analysts Journal, vol. 47, no. 3 (May/June):40–48.
- Goetzmann, William N., and Roger G. Ibbotson. 1994. “Do Winners Repeat?” Journal of Portfolio Management, vol. 20, no. 2 (Winter) :9–18.
- Hensel, Chris R., D. Don Ezra, and John H. Ilkiw. 1991. “The Importance of the Asset Allocation Decision.” Financial Analysts Journal, vol. 47, no. 4 (July/August):65–72.Ibbotson Associates. 1998. Stocks, Bonds, Bills, and Inflation, 1998Yearbook. Chicago, IL: Ibbotson Associates.
- Sharpe, William F 1992. “Asset Allocation: Management Style and Performance Measurement.” Journal of Portfolio Management, vol. 18, no. 2 (Winter) :7–19.
- Stevens, Dale H., Ronald J. Surz, and Mark E. Wimer. 1999. “The Importance of Investment Policy.” Journal of Investing, vol. 8,no. 4 (Winter):80–85
TOTAL: 100 MARKS