Your report should provide concise and relevant answers to all questions below and the corresponding computer outputs. It does not need to follow a formal report format.
The computer outputs should be attached as an appendix to your report. In conducting statistical tests throughout, clearly state all relevant information, such as the null and alternative hypotheses, the distribution you use, the level of significance, the decision rule (critical value or p-value).
Note that the “explain”, or “interpret” type questions require concise and to-the-point answers (no more than 0.5 A4 double-spaced page), but they should be relevant and informative. Your report should be typed or hand-written clearly on A4 pages, double-spaced. (Unclear hand-writing may be penalized)
Task 1:
Test whether the Microsoft stock out or under-performs the market.
“Tech stocks typically have higher beta. An example is the dot-com bubble. Although tech stocks did very well in the late 1990s, they also fell sharply in the early 2000s, with a much worse decline than that of the overall market.”
The above statement implies that Microsoft (a Tech stock) is an aggressive stock.
Evaluate this claim by interpreting the relevant coefficient estimate and conducting an appropriate statistical test.
“Mobil-Exxon” is an oil company with stable business conditions and should be a safer investment than the overall market”
The above statement implies that Mobil-Exxon is a defensive stock. Evaluate this claim by interpreting the relevant coefficient estimate and conducting an appropriate statistical test.
Based on the estimation results, fill out the following table:
Interpret the 95% confidence intervals for GE, GM, and Disney, paying attention to their risk profiles (aggressive, defensive, neutral).
An investor is seeking your recommendation to invest in three stocks among the above. Her goal is to form a portfolio of three stocks with well-diversified risk profiles. State your recommendations and justify your choice in relations to the properties of their ß values based on the confidence intervals obtained in the table above
Task 2
Based on your regression results for these five stocks, explain how their expected excess returns are related with different risk factors such as market premium, size premium and value premium. {you should interpret the relevant estimated coefficients, taking account of their magnitude, signs, and statistical significance}
It is claimed that the stock “dis” is unrelated with the size and value premia, in the sense that the relevant coefficients in the Fama-French model is jointly equal to 0. Test this hypothesis using the F-test.
It is claimed that the stock “xom” is not affected by the size and value premia, in the sense that the relevant coefficients in the Fama-French model is add up to 0. Test this hypothesis using the F-test.
It is claimed that the stock “msft” has the same sensitivity to the size premium and value premium in the sense that the relevant coefficients in the Fama-French model are equal. Test this hypothesis using the F-test.