ACFI111 - Quantitative Methods for Accounting and Finance Assignment

Assignment Task

1. Using the output from the descriptive statistics, do you think the returns of the companies are normally distributed?
   • If the returns are not normally distributed, what are the implications of this non-normality for the CAPM model?
2. Using a 5% signi cance level, formally test whether the variance of the stocks are equal to that of the

• Present the null and alternative
• Implement and interpret the results of the test: What is your conclusion? Does you conclusion change if you use a 1% signi cance level?
• How does the beta of the stock relate to the variances of the companies and the

3. Compute the CAPM model, e. estimate the following linear regression model

R_t − R_f = α + β (R_M,t − R_f ) + ϵ_t,

where R_t is the return of one of the companies, R_f is the risk-free rate, R_M,t is the market index return, and ϵ_t is the error term. α and β are respectively the intercept and slope. Please note that the risk-free rate (R_f ) is already expressed in percentage points.

• Interpret the Regression 
• Using the output of the regressions and a 1% signi cance level, test whether the companies are

      Explain how you would carry out the test.

      Discuss the test statistic and the critical value.

      Explain the economic importance of testing this null hypothesis. In other words, why is this an interesting hypothesis and what do we learn from this test?

• Using the output of the regression, test whether the companies are riskier than the market Use a 1% signi cance level.
• Explain how you would carry out the test. Discuss the test statistic and the critical value.
• Explain the economic importance of testing this null hypothesis. In other words, why is this an interesting hypothesis and what do we learn from this test?
• Plot the Security Market Line for all the stocks and comment on the prof- itability of investing in these   

4. A nancial analyst has recently commented on ABC News that tomorrow's stock Market index will increase by 10% driven by good economic results, e. R_M,t+1 = 10%. Based on this information, predict the next-day expected return for McDon- ald's Corp. (MCD), and construct the con dence interval using a 95% con dence level. Interpret this result. 
5. A colleague points out that the explanatory power of your model could be Discuss how you would modify the research design to address this concern.

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