Posted: April 11th, 2015

Financial Modelling

Financial Modelling

using data from Yahoo! Finance and the models covered in the module.
Question: You work for an investment bank and you are asked to prepare a financial report. In order to prepare your report, you need to download the weekly dividend-adjusted closing prices for: i) S&P500 (GSPC), ii) Unilever (UL), and iii) another firm (see Firm-Student ID.xlsx for your firm) for the period 1/1/2012- 1/1/2015. Using this data, you should then compute the corresponding weekly returns. In the report, you should include the following:
Descriptive statistics
Report the mean, the median, the range, the variance and the standard deviation of the weekly returns for each of the three assets. Explain both the statistical and financial meaning of these statistics. Explain which one of these three assets you would recommend to a potential investor based on their risk-adjusted returns. (10 marks)
Suppose you build a portfolio that allocates 60% of your total funds to Unilever and the remaining 40% to the stock of your firm. Discuss the relationship between the weekly returns of the two companies using the appropriate XY plot. Calculate the covariance and correlation between the weekly returns of your firm and Unilever. Also compute the average return and the standard deviation of your portfolio. (10 marks)
The Capital Asset Pricing Model
Create an XY plot of the excess returns of the S&P500 (X-axis) vs. the excess returns of your firm (Y-axis), assuming a constant weekly risk-free rate of 0.05%. Fit the Capital Asset Pricing Model (CAPM) regression line, and display the regression equation and the R-squared on the plot. Discuss the explanatory power of the model. (10 marks)
Estimate the CAPM regression using the Data Analysis Tool of Excel. Discuss the interpretation of the two regression coefficients ( and ?) both from a statistical and from a financial viewpoint. Examine the significance of the above regression coefficients at the 5% and 10% significance levels.
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Also report the 90% and 95% confidence intervals for the two coefficients and discuss their meaning. (10 marks)
Discuss whether the stock of your firm offers significant abnormal returns using Jensens alpha. Using the Sharpe ratio and the Treynor measure and assuming the risk-free rate given above, which one of the following two stocks would you recommend to potential investors, Unilever or the stock of your firm? Also, discuss the following: i) under what circumstances the Treynor measure is preferred over the Sharpe ratio and ii) the relationship between Sharpe ratio and the security market line. (15 marks)
Forecasting
Using the lagged regression model, discussed in Lecture 17, examine if the returns for the previous four weeks on Unilevers stock can predict the current weeks return on your firm. Plot the actual and predicted values of your firms returns in the same graph. Discuss what the distance between the two lines represents. (15 marks)
Bond Valuation
Suppose your company decides to issue new bonds. Compute the fair value of your firm’s bond knowing that it pays semi-annual coupons with an annual coupon rate of 7%, it has a par value of $1,000 and a maturity of 12 years. The required return for the bond is 5%. Using the appropriate graph show how the value of this bond changes as a function of the yield to maturity. Based on the above graph, discuss how the bond value is affected by changes in the interest rates. (15 marks)
Consider the bond of your company as described above. Discuss the following: i) Calculate the percentage of the bond price that arises from coupon payments and the corresponding percentage of the price that comes from the face value, ii) If the bond is callable at $1,100 after the first 5 years of its life compute the yield-to-call. (15 marks)
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Important details
The file Firm-Student ID.xlsx provided in the Assignment 2 folder at the Blackboard site of the module assigns a real U.S. firm to each student id. Therefore, you should prepare the report for the firm assigned to you.
To find the data you need, you should use Yahoo! Finance. A link to each firms webpage is provided in the above file as well.
The question is strongly related to the material covered in Lectures 10-18 and Labs 5-7 of the module and the associated chapters from the textbooks.
You should prepare your report in Microsoft Word or in another word
processing software.
In each section of the report, you should also include details about the data
you used and the formulas you applied for your computations. However,
try to be brief and clear in your answers.
The question should be answered using Microsoft Excel in a single workbook with multiple worksheets. In the first worksheet, you should include all the data you got from Yahoo! Finance.
You should submit a hard copy of your report to the HUB including a hard copy of your Excel workbook as an appendix to your report.
30% of the total mark will be subtracted from submitted assignments that do not include a printed copy of the Excel workbook.
You should present your formulas and models in Word and Excel in a helpful and clear way. You should also use an appropriate format for the Excel cells. All graphs should be included in your report as well (Word file).
More details about coursework submission can be found at http://www.uea.ac.uk/calendar/section3/regs(gen)/submission-of-work-for- assessment-(taught-programmes)
Any questions related to the coursework should be submitted to the Assignment 2 Questions forum within the Q&A forum on the Blackboard Site of the module. The link to the Q&A forum is below the link to Module Documents. To ask a question, click on Create a New thread and post your question. You should also click on Subscribe to receive an email when a new question is posted. You should visit this forum regularly.