Collect the monthly price data for TSX Composite Index (Market Index for Canadian equities) and for 5 stocks listed in Toronto Stock Exchange (TSX) for the period of January 2010 to September 2019 and perform the following tasks (Note that a summary of each task should be there in your project report and all the spreadsheet calculation should be in a single spreadsheet):
1. Compute weekly returns for market index and 5 stocks randomly picked from TSX.
Hints: You can annualize monthly returns by multiplying by 12!. Do all your calculations in a single Excel spreadsheet.
2. Compute average (mean), median, minimum, and maximum returns for the market returns and stocks returns and summarize in a single table. Rank the stocks and market index based on the mean returns (1 for the highest return and 6 for the lowest return). Hints: You can use Excel functions (AVERAGE, MEDIAN, MIN, and MAX) to get these statistics and you can rank the securities manually.
3. Prepare a variance-covariance matrix and present in a table. Prepare a separate table for standard deviation for stocks and market and rank them from highest to lowest standard deviations. Hints: You can use Excel Add-ins (Data Analysis package) to develop a variance-covariance matrix. See the notes below. Alternatively, you can manually compute variances and covariances between/among stocks and markets using Excel functions (VAR, and COVAR).
4. Based on your findings in Part (2) and (3), write 1 paragraph explaining risk and return of the stocks and the market.
5. Just below the paragraph in Part (4), present a graph or graphs for stock prices and market index (not from the returns data!). Identify any patterns or trends in the graph(s). Briefly elaborate in one paragraph. Hints: You can identify some bullish and bearish trends and can relate to overall economic scenarios of Canada during the period(s) or some company specific events during the period(s). Do some research!
6. Prepare a correlation matrix and present in a table. Explain the correlations between the stocks and shed lights on benefits from portfolio diversification. If you would like to choose 3 stocks (among 5 stocks) for your portfolio which stocks would you choose and why? Hints: Either use Data Analysis package in Excel or use CORREL function in excel to find correlation between two series.
7. Now, compute the beta coefficient for each stock you have in your sample (all 5 stocks) and indicate whether the given stock is aggressive stock or defensive stock or natural stock. Hints: You can use information available in variance-covariance matrix and use the formula . Alternatively, you can run a regression using Data Analysis package where stock returns series is Y and market returns series is X, and the slope coefficient is the beta of the stock.
8. Now compute the expected rate of return or required rate of return for each stock and draw a Security Market Line graph and identify whether the stocks are correctly priced or underpriced or overpriced. Hints: Find the 90-day T-bill rate from the Bank of Canada and Statistics Canada website. T-bill rates are often annualized. If you have not annualized your stock/market return data, then you need to convert annual T-bill rate to monthly T-bill rate by dividing 12! [20 marks]
9. Suppose you had invested $100,000 on each of three stocks (total $300,000) you have chosen in Part (6) at the beginning of the period, that is, January 2010.
a. How much would be the value of your portfolio at the end of the sample period, that is, in the October 2019 (the last depends on the date in which you download the data!)?
b. What is your holding period return? Hints: Use TVM concept to find annual return?
c. What is the standard deviation of your portfolio?
d. What is the beta of your portfolio?
e. What is the expected return on your portfolio? Is it underpriced or overpriced?
Hints: Create a new column as a portfolio return for each month where portfolio return r(portfolio) = wA*rA+wB*rB+wC*rC. Guess the weights! You can now compute mean and standard devotion of this series and covariance with market returns series. At the beginning, the value of your portfolio is $300,000. A simple yet rational thinking will provide you what would be value of your portfolio at the end of the period!
10. Write 1 paragraph of your reflections explaining what you have learned after completing this project report.
Preparing a project report as specified in the project report format below.
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