Financial Quantitative Methods
Project: Risk, beta and rate of return within the CAPM and DGM
The purpose of this project is to conduct an analysis where students use CAPM and DGM to analyse and calculate the required rate of return, which is widely and empirically used in stock valuation.
In this project assignment, students are required to select a UK/USA stock listed in London/New York stock Exchanges. The company must have paid out dividend in the last 5 years. The selection should be confirmed by the instructor. Students can perform this task individually or in pairs. No Groups of three or more.
Students are to collect daily prices of the stock from Yahoo Finance! along with the relevant market index (FTSE 100 for LSE and S&P500 for NYSE). Daily returns are to be calculated. The period under study is 1/1/2012 to the most recent date.
In addition, students are required to collect Dividend data from Yahoo Finance for their company for the period under study. This is to calculate the (average) historical growth rate (g) which is used in DGM.
Students will also need to calculate Sustainable growth rate (g) using the formula g = ROE * (1- Dividend payout ratio). I suggest the following website www.4-traders.com to get ROE and dividend out ratio for the year 2017/18. You type the name of the company in the Search Box, then click Financials. A list of fundamental data will come up. You select the appropriate items needed for the formula.
You are required to conduct an analysis and calculate required rate of return within the CAPM and DGM frameworks. Students should provide an analysis of beta of their company by calculating it on an annual basis to look into the trend and explaining it potential determinants.Other variables included in both models are to be estimated or borrowed from credible data sources.
You are required to write a report of up of 4,000 words double spaced (Font 12 , Time New Roma) where you analyse the results. 5% credit is allocated to writing style and grammar.
Suggested structure:
- Title should include the following "analysis of correlation and beta of the listed company:
- Introduction: explain what you intend to analyse in your report
- CAPM and DGM
- What is beta and its role?
- Presentation of the company
- Analyse beta for your company and compare it to competitors/industry
- Report and interpret descriptive statistics of return rate along with risk measures (mean, standard deviation, variance, coefficient of variation, correlation;)
- Calculation of rate of return using CAPM model (students should report the sources of risk-free rate and market risk premium;)
- Calculation of growth rate of earnings (historical growth rate and sustainable growth rate) used in DGM and calculation of required rate of return using DGM model
- Conclusion: Compare the results from both models, and provide the disadvantages of both models.
The presentation should follow the same structure of the report with greater focus on the analysis of the results. 10% of the mark of the presentation is allocated to answering questions correctly. I recommend 3-4 questions per student.
Attachment:- CAPM and DGM.xlsx