Single Index Model - Systematic and Idiosyncratic Risk - Report Writing Finance Assignment Help

Assignment Task:

Question 1

The spreadsheet contains daily returns on 10 different stocks and the S&P/ASX200. The S&P/ASX200 is a proxy for the market portfolio. The daily returns are total returns and incorporate price changes and dividend payments. As the annual risk-free rate is very close to zero and you are using daily data, we can assume that the daily risk-free rate is zero.

understand risk and return. Throughout the assessment, you need to link your calculations to what has been happening in financial markets.

1a) The Single Index Model  

1. Estimate the Single Index Model for each stock separately for 2019 and 2020 using Excel. You will need to estimate four regressions in total (2 stocks x 2 years).

2. Discuss the differences in beta between the two stocks in 2019 and 2020. What explains the differences?

3. Discuss the change in beta from 2019 to 2020 for each stock.What explains the differences?

4. How has total risk, systematic risk and idiosyncratic risk changed for each stock? What do you think has caused these changes for the two stocks?

5. Did the alpha and beta estimates from 2019 provide a reasonable prediction of stock returns in 2020 for the two stocks you are analysing? Why or why not?

6. Your discussion of the abovepoints needs to incorporate relevant qualitative information on the two stocks from your own research.

1b) Multifactor models, such as the Fama-French 3-factor model, are used extensively in finance. Do you think a multifactor model would help improve your results in part 1a? Why or why not?  

1c) Perform an Event Study on your two stocks selected between 2/3/2020 and 1/6/20. What can you infer about the efficiency of financial markets from the stock return behaviour? 
1d) Using the data from 2019 only, which of the two stocks that you selected would you invest in if you were adding it to an investment in an Australia market index fund (S&P/ASX200). Why? 

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