Stocks Analyzed Report Sample

Introduction

This report describes the analysis of two stocks using the single index model. It describes the sources of data, methods of analysis (Single Index Model and regression analysis) and explanation of findings. The final results are useful for decision-making in the financial strategy.

The table above contains the information about two analyzed stocks. First stock is from ASIC short sales list, it places fifth position in the list of the highest number of reported short positions. This stock is the stock of Myer Holding Limited that provides different customer services. The second stock is NAB.AX, because the second last digit of my student number is even. This stock is the stock of NAT. Bank FPO that is a financial intermediary.
The stock of Myer Holding Limited has the negative return and the higher standard deviation than standard deviation of the stock of NAT. BANK FPO. It means that the stock MYR.AX is more risky than the stock NAB.AX. The stock of Myer Holding Limited is the most inefficiently priced, as the stock with higher risk should have the higher return.

Data and the Risk-Free Asset

All data analyzed in this project is from January 2013 to January 2015. The prices of two analyzed stocks and of S&P/ASX-200 Index (proxy of the market) were retrieved from au.finance.yahoo.com. The return on market and the return on stock are computed using the following formula:
rt=(pt-pt-1)pt-1;
where rt – the return of the stock during the period t;
pt – the price of the stock during the period t;
pt-1 - the price of the stock during the last period t-1.
All retrieved prices are adjusted for dividends and for stock splits. It necessary to use the dividend and split multipliers. The dividend multiplier is calculated using the following formula: 1-Dppcp, where D is the dividend on the stock and ppcp is pre-dividend close price of stock. The split multiplier is computed as split ratio. For instance, in a 2 to 1 split, the pre-split close price is multiplied by 0.5.
The 30 day bank-accepted bill is used as a proxy of risk-free asset. The data was retrieved from official website of Reserve Bank of Australia. The data was presented as percentage per annum, so it was divided by 1200 for determine the month risk-free return.
There are two assets that it possible to consider as risk-free asset: the 30-day bank-accepted bill and one-month Treasury note. Both assets are very secured. The 30-day bank-accepted bill can be emerged only by central bank and the one-month Treasury note can be emerged only by government. The 30-day bank-accepted bill has higher return. This asset is suitable to use it as risk-free asset.

The Single Index Model

The single index model is the model that is used in financial analysis for determination of rate of return of stocks. This model takes into account the market return, the return of risk-free asset, responsiveness of stock to market return and other risks. The formula of this model is presented below:
ri-rf=αi+βirm-rf+εi,
where ri – the return of the stock;
rf – return of risk-free asset;
(ri-rf) – excess return on the stock;

αi – alpha of the stock;

βi – beta of the stock (measure of the responsiveness of stock to market return);
rm – return on the market;
rm-rf - excess return on the market;

εi – residuals return.

Regression Results and Interpretation
The table above includes alphas, betas, standard errors and R Square of two analyzed stocks. Each measure describes the stock performance.
Alpha of the stock presents an abnormal return that cannot be determined. The alpha of stocks is enough high, the abnormal return of Myer Holdings Ltd is negative and the abnormal return of NAT. BANK FPO is positive.
Beta of the stock reflects the sensitiveness of the stock to changes of market return. The sensitiveness of the stock of Myer Holdings Ltd is higher than the sensitiveness of second stock. It means that the stock of Myer Holdings Ltd also has higher risk. Both stock are aggressive as the betas are enough high.
The standard error reflects the non-systematic risk and the R Square reflects the systematic risk of the stock. The standard error of the stock of Myer Holdings Ltd is significantly higher than the standard error of the stock of NAT. BANK FPO. And the R square
of the stock of NAT. BANK FPO Ltd is significantly higher than the R square of the stock of Myer Holdings Ltd. We can diversify almost all risks of stocks.
The betas found from other sources can differ from betas computed in this analysis as it possible to use more than one factor model, the function of historical betas or other time spans to determine beta.

Trade Idea and Risks

The table above contains alphas and betas of two stocks: the stock of Myer Holdings Limited and SPDR S&P/ASX 200 as proxy of S&P/ASX 200 index ETF. To create the risk-free portfolio we have to meet the following conditions: W1βm+W2βs=0; where W1+W2=1.
W1βm-W1βs+βs=0→ W1=-βsβm-βs→W1=-0,922591,78389-0,92259=-1,07116;
βm-W2βm+W2βs=0→W2=-βmβs-βm→W2=-1,783890,92259-1,78389=2,07116.

Such portfolio has a very low risk. To compute the return of this portfolio, it necessary use the following formula:

rp=W1αm+W2αs;
rp=-1,07116*-0,015906+2,07116*0,002132=0,01704+0,00442=0,02146.
rp%=0,0215*100=2,15%.
These values are computed using the historical data, so we can receive unexpected results in the future.