Example Of Report On Stocks Analyzed

Introduction

This report is about an application of the single index model and regression for analysis of stocks. It describes the process of analyzed stocks selection, the sources of data and consecution of analysis, includes formulas and values. Each section of report describes the findings and their meanings.

Two stocks were analyzed in this assignment. The table above includes information and data of these stocks. First stock in the table, the stock of Ten Network Ltd., is the third highest stock in the reported short positions list of Australians Securities & Investments Commission.
The second stock, the stock of BHP Billinton Ltd., is chosen because the second last digit of my student number is odd.
Ten Network Holdings Ltd and BHP Billinton Ltd operate in the different industry groups. BHP Billinton Ltd discovers and acquires the natural resources. Ten Network Holdings Ltd provides the services.
Both stocks have negative return and the stock of Ten Network Holdings Ltd has less return. Standard deviation reflects the risk of the stock. Standard deviation of Ten Network Holdings Ltd is significantly higher than the standard deviation of BHP Billinton Ltd stock. The stock with highest return should be more risky, so we can note that the stock TEN.AX is the most inefficiently priced.

Data and the risk-free asset

All data of stock prices (the stock of Ten Network Holdings Ltd and the stock of BHP Billinton Ltd) and of market index (S&P/ASX-200 Index was used as a proxy of market return) were retrieved from au.finance.yahoo.com. The time span of data is from January 2013 to January 2015.
The return of analyzed stocks and market index were computed using the following formula: (Price of current period – Price of last period)/Price of last period.
All retrieved prices of stocks were adjusted for dividends and splits. It is necessary to use the dividend and split multipliers for such adjustments. The split multiplier is a split ratio (in 2 to 1 split the ratio will be equal to 0.5). We have to multiply the pre-split price of stock by this ratio for adjustment. The dividend multiplier is calculated using the next formula(1-DPp), where D is the dividend on stock and Pp is the pre-dividend price of the stock.
The data of risk-free return was retrieved from the official website of Reserve Bank of Australia (http://www.rba.gov.au/). We use the 30-day bank accepted bill as a proxy of risk-free asset. The data was retrieved in the percentage per year, so we divided all values on 1200.
We can use two securities as a proxy of risk-free asset: the Treasury note and 30-day bank accepted bill. The second security has some risks in the conditions of the financial crises as the central bank emerges these securities, but it is very secured. The 30-day bank accepted bill has higher return than the Treasury bill. The Treasury bill is emerged only by government. Both assets are suitable for proxy of the risk-free return.

The single index model

The main model that was used for this analysis is the single index model. It is a financial model which is used for calculation of stock return taking into account different factors, such as the abnormal return, the market return and the return on risk-free asset. In addition, this model takes into the sensitiveness of the stock return to the changes of market return. This model can be presented in the following formula:
ri-rf=αi+βirm-rf,
where ri is the return on stock;
rf is the return on the risk-free asset;

αi is the abnormal return;

βi is the beta of the stock and the measure of sensitiveness of the stock return to changes of the market return;
rm is the market return.

Regression results and interpretation

The table includes the regression results of two stocks. Each value characterizes the stock. The table contains such values: betas, alphas, standard errors and square R of two stocks.
Beta reflects the sensitiveness of the stock to the changes of market return. The beta of BHP.AX is positive and enough high. It means that the stock return is changed directly proportional to changes of market return. The TEN. AX stock is inversely to the changes of market return. It means that the return of the stock increases when the market return decreases.
Alpha of the stock is abnormal return of the stock. It cannot be calculated by formulas. Both alphas of stocks are negative and have enough low value.
The standard error reflects non-systematic risk of the stock. The non-systematic risk of TEN.AX is higher the non-systematic risk of BHP.AX more than in two times. The R square presents the systematic risk of the stock. The systematic risk of Ten Network Holdings Ltd stock is very low. And the systematic risk of BHP Billinton Ltd stock is enough high. It is higher the risk of first stock in 10 times.
The betas in this analysis can differ from betas from other sources, because it possible to calculate beta differ one from other. For instance, we can use the data in other time limits or we can use the function of historical beta to determine current beta, or we can use the multi-factors model to compute beta.

Trade idea and risks

The table contains the information about two stocks. First stock is the highest stock in reported short position list of Australian Securities & Investments. The second is SPDR S&P/ASX 200 Fund that is the proxy of SPDR S&P/ASX index ETF. To create the risk free portfolio, it is necessary to calculate such weights that the portfolio β will be equal to zero: W1βT+W2βS=0; where W1+W2=1.
w1=βSβS-βT=0.9225925570.922592557+0.559577939=0.9225925571.4821705=0.6225,
w2=βTβT-βS=-0.559577939-0.559577939-0.922592557=-0.559577939-1.4821705=0.3775.
rp=w1αT+w2αS;
rp=0.6225*-0.017790136+0.3775*0.002132577=-0.01026931.
The return of this portfolio is low and negative. We also can have unexpected results, because all calculations in the analysis are based on the historical data and cannot exactly forecast the behavior of stocks and traders on the market.