Assignment -
Objective: This assignment asks you to prepare a financial report for a real U.S. firm using data from Yahoo! Finance and the methods presented in the second part of the module. The report needs to be at professional standards and easy to read.
The firm's name is 'Pepsico Inc.'
Question: Suppose you work as a quantitative analyst in a big hedge fund and you have been asked to prepare a financial report. In order to prepare your report you need to collect data on monthly dividend-adjusted closing prices for the firm assigned to you and for the period from January 2000 to December 2017 (you can find your firm in the "Assigned Firms CW2.xls" file inside the Coursework 2 folder in the "Summative Assessment 17/18" section of the Bb).
In addition, you will have to use monthly data on the following variables: (i) the return on the S&P500 index, (ii) the CPI inflation rate, (iii) the default spread, and (iv) the VIX index (i.e. monthly volatility computed from option prices). You can find the above data in the "Economic_Data.xls" file on the Bb (same folder as above).
You should include the following items in your report:
Regression Analysis -
Your purpose is to build a simple model to explain the monthly returns of your firm's stock, using the above four economic variables. To this end, you need to estimate the relevant regression using the "Data Analysis Tool" of Microsoft Excel. Then perform the following tasks:
- Discuss the interpretation of the slope parameters (i.e. betas).
- Discuss the statistical significance of the slope parameters at the 5% and 10% significance levels, respectively, using the p-value, t-statistic, and confidence intervals.
- Plot a histogram of the residuals. What do you conclude regarding the distribution of the residuals?
- Describe how you would test the restriction that the slope parameter of the VIX index is equal to the slope parameter of the default spread using the appropriate test (Hint: No estimation required just a description of the approach and test).
- In the context of the initial multiple regression test whether the returns on your firm's stock are on average higher in January. Is there any evidence in the literature about this relationship? Be brief in your answer.
Forecasting -
Suppose you want to build a model to predict the monthly returns of your firm. To do this, you need to perform the following tasks:
- Apply an exponential smoothing to the series of monthly returns of your firm's stock with a smoothing constant of 0.8. Change the smoothing constant to 0.3. Plot the two smoothed series on the same graph. Why are they different?
- Estimate a regression to examine if the returns of the S&P 500 of the previous six months can predict the current month returns of your firm's stock. Comment on the overall predictive ability of the model.
- Calculate the mean squared error of the above three methods and discuss which one has the best predictive performance and why.
- "Good models always produce better forecasts". Briefly discuss this statement.
Derivatives -
Your company enters into a short position in a futures contract to sell 5,000 bushels of corn for 250 cents (i.e. $2.5) per bushel. The initial margin is $3,000 and the maintenance margin is $2,000.
a) What price change can lead to a margin call?
b) Under what circumstances would $1,200 be withdrawn from the margin account?
Explain how the margin account protects an investor from the possibility of default.
Word limit: The report should not exceed 3,000 words. This limit excludes the Appendix, but includes the references.
Attachment:- Assignment Files.rar