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Q1

 

Value

Mean

30.26354

Variance

247.0224

Standard Deviation

15.71695

Skewness

1.150387

Kurtosis

3.82424

Coefficient of Variation

0.519336

Minimum

9.156000

Maximum

75.625000

Number of Observation

180

Mean ( μ ): It is the average value of the observation, which is calculated by taking the sum of observed values (X) divided by the number of observations (N).

Variance (σ 2 ): It is a measure of the difference between observed values from the mean or the spread of values from the mean. It is referred to as the second moment and is denoted as:

(X¿ μ) 2

N σ 2 =¿

Standard deviation (σ): the most popular estimator of standard deviation is the sample standard deviation. It is the measure of the dispersion of a set of data from the mean of the data set. Higher dispersion results in higher standard deviation. The advantage of using standard deviation is that it is simple to use and widely accepted. The disadvantage of standard deviation is that it does not work for comparing the variation of items of different units, in addition to this it doesn’t work well when comparing if two mean levels of a price series are different. Higher price levels will result in higher standard deviations (double a price series results in double the standard deviation despite variation not doubling). Standard deviation is calculated as below:

Q1 Value Mean 30.26354 Variance 247.0224 Standard Deviation 15.71695 Skewness 1.150387 Kurtosis 3.82424 Coefficient of Variation

Skewness: Skewness is a measure of asymmetry from the normal distribution; a negatively skewed distribution in the case of a stock return distribution would have a long thin tail to the left of the distribution. This would indicate large negative returns or high risk. The advantage of skewness when analyzing stock data is that it measures large losses, which are of greatest importance to risk managers. Skewness is referred to as the third moment.

Kurtosis: Kurtosis is a measure that describes the shape of the distribution’s tails, positive kurtosis means there are fat tails and peak when compared to a normal distribution. If we find positive kurtosis then the distribution has fatter tails, then the normal distribution.

In the context of stock distributions this means that if the distribution has positive kurtosis it has more large losses and large gains then the normal distribution. This means that it would have more risk than expected because it has more large losses then a normal distribution would expect. Kurtosis is referred to as the fourth moment. The advantages of kurtosis are that if fat tails kurtosis blows up extreme observations in the tails. This makes it more sensitive to risk and useful to detect if there are very large or small observations in the sample or outliers. The disadvantage of kurtosis is that there could be fat tails mainly to the right which would indicate “fat tail” risk however these are large gains, so they aren’t risky (depends on theory).

Coefficient of variance: Coefficient of variance is calculated by dividing standard deviation by the mean. The advantage of dividing the standard deviation by the mean level is that it adjusts the standard deviation to the price level. This is an important advantage of the standard deviation because it can be used for comparison between stocks at different price levels. It is also a unit-less measure meaning that it doesn’t matter what units the comparing distributions are in (ex. per lbs. or kg). The disadvantages of co-efficient of variance are it doesn’t work if the mean is zero or close to zero, this is because the coefficient becomes sensitive to the mean. This means that coefficient of variance isn’t a good measure when comparing price changes over short-term time scales. It works best for price level comparisons.

C V =

σ

μ

Minimum: It is the lowest value observed in the data, this can be valuable to measure large losses. It is best practice to use several minimums to reduce the error of analyzing an outlier.

Maximum: Maximum is the highest observed value in the data set. This isn’t as useful for risk management as the minimum because large gains don’t pose the same risk threat as large losses do. A minimum and maximum comparison can be used to create a range of possible expected outcomes.

Jarque - Bera normality test:

JB = 44.797 p-value = 1.873e-10 at 5 % significance level Ho: normality H1: non-normality

Interpretation: The degrees of freedom are 2 for kurtosis and skewness. Under Hypothesis of normality the p value should be more than 5% to fail to reject null hypothesis. So, reject Ho if P-value < 0.05

Here P-value is 1.873e-10 < 0.05. Here the p value is very low than 0.05. So, we will reject Ho: Normality.

Histogram: Plotting the frequency distribution

Histogram: Plotting the frequency distribution Q2. Q2 R Mean 0.0114918 Variance 0.0019616 Standard Deviation 0.0442896 Skewness

Q2.

Q2

R

Mean

0.0114918

Variance

0.0019616

Standard Deviation

0.0442896

Skewness

-0.1134826

Kurtosis

4.4143630

Coefficient of Variation

3.8540120

Minimum

-0.1647354

Maximum

0.1511939

Jarque-Bera normality test:

JB = 15.304 p-value = 0.0004751 at 5 % significance level Ho: normality

H1: non-normality

Interpretation: The degrees of freedom are 2 for kurtosis and skewness. Under Hypothesis of normality the p value should be more than 5% to fail to reject null hypothesis. So, reject Ho if P-value < 0.05

Here the p value is very low than 0.05. So, we will reject Ho: Normality. Histogram: Plotting the frequency distribution of exxon.diff

Here the p value is very low than 0.05. So, we will reject Ho: Normality. Histogram:

Observations:

  • The exxon.diff data represents the log differences or percentage price changes of Exxon stock prices. The Exxon price data represents the price level of Exxon stock prices.

  • The low standard deviation of exxon.diff mean that the data is closer to the mean. Wherein for Exxon price the standard deviation is high which means the data for Exxon price is spread out over a large range of values.

  • The coefficient of variance statistic in the Exxon price data was useful because low CV indicates more precise estimate. The CV is high for exxon.diff.

  • Both Jarque-Bera tests for Exxon price and exxon.diff rejected the null hypothesis of normality.

  • The price percentage change data (exxon.diff) shows a higher level of kurtosis then the price data (Exxon price).

  • The percentage change data also shows negative skewness while the price data shows positive skewness.

Q3.

  • a. Regression (linear) Analysis Result (from R program)

Residuals:

Min

1Q

Median

3Q

Max

-0.172781 -0.026036 -0.002868

0.026709

0.141160

Coefficients:

 
 

Estimate Std. Error t value Pr(>|t|)

(Intercept) 0.012150

0.003421

3.551 0.000491 ***

test$dqsp

-0.058350

0.075355

-0.774 0.439768

---

Significance codes:

0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1

Residual standard error: 0.04434 on 177 degrees of freedom Multiple R-squared: 0.003376, Adjusted R-squared: -0.002255 F-statistic: 0.5996 on 1 and 177 DF, p-value: 0.4398

Observation:

Beta, Exxon Stock Price = f (S&P500) Beta = -0.058350

  • The Beta coefficient interprets the price movements of Exxon compared to the independent variable S&P500 or how much of the S&P500 price movements explain the price movements of Exxon stock. Beta measures systematic

  • From the regression analysis, we get Beta = -0.058350, then a 100% change in the price of the S&P500 index would result in a 5.835% negative price movement. However, if we plot the points of the regression analysis there isn’t a tight correlation of points this means that the S&P500 doesn’t have much predictive power for the movement of Exxon stock. This could be because we computed a Beta over many years of data and the Beta of Exxon may have changed over time giving us mixed results.

  • Beta is a measurement of variation of the stock against the index in this case. This can tell the investor how the stock moves against the average, modern portfolio theory believes that companies with a Beta less than 1 meaning they move less than the market are perceived as less risk, however this is not always the case because the stock could be going downward when the market is rising. It measures variability instead of loss.

b.

Residuals:

Min

1Q

Median

3Q

Max

Coefficients:

Estimate Std. Error t value Pr(>|t|)

(Intercept) 0.012084

0.003235

3.735 0.000253 ***

df2$dqoil

0.109103 0.034483

3.164 0.001832 **

---

Significance codes:

0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1

Residual standard error: 0.04321 on 177 degrees of freedom

Multiple R-squared: 0.05353,

Adjusted R-squared: 0.04818

F-statistic: 10.01 on 1 and 177 DF, p-value: 0.001832

Observation:

Beta, Exxon stock price = f (Crude Oil Price) Beta = 0.109103

The Beta coefficient in this case tells the investor that the percentage price change

of Exxon stock moves positively with the price of crude oil. If crude oil goes up by 100% it results in Exxon going up by 10.91033%. Exxon has a relatively low Beta with the price of crude oil because Exxon is diversified into many businesses some such as oil refinery operations outperform when oil prices decrease and other such as oil drilling do better with higher prices.

  • c. Durbin Watson Test for Autocorrelation in the both cases of a) and b)

Durbin Watson for a. = 2.133 Durbin Watson for b. = 2.1324

There is negligible amount of negative autocorrelation zero autocorrelation being a DW statistic of 2. We wouldn’t expect to find autocorrelation in this data because we used

first differences to minimize the autocorrelation issues.

  • d. For regression analysis in 3a, I expected initially to have a coefficient of Beta close to 1 because it is generally accepted that most stock prices follow the market quite closely. However, after further analysis it is understandable that over a long period of time the Beta of Exxon has changed and that the companies price changes don’t follow the S&P500 index closely. For the regression analysis of 3b, at first, I expected that the Beta between oil prices and Exxon stock changes would be more significant but because of the diversification of Exxon’s operations having a low Beta is reasonable.

Q4.

P/E Ratio over years 50 45 40 35 30 25 20 15 10 5 0 Years
P/E Ratio over years
50
45
40
35
30
25
20
15
10
5
0
Years
P/E
1930
1933
1936
1939
1942
1945
1948
1951
1954
1957
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
P/E rato

For the investor I think that the P/E ratio is a better measure of risk for the S&P500 index because movement or variability doesn’t incur loss. The P/E ratio is a measurement of price/ earnings indicating over or undervalued. As the P/E ratio gets higher I think it is a good indicator of the probability of loss. Whereas the variability of the market index may does not indicate whether it is over-valued or undervalued. The index may have periods of low volatility but be drastically overvalued, as we have seen in the years preceding the financial crisis of 2008.