Which stock should invest in?

Statistics for Business and Finance (BUS5SBF)

Assignment 2

Team leader:
Nick Xue (20474674)

Members:
Himasha Kothalawala (19604700)
Qiuyu Zheng (20113657)
Manisha Tamang (20342760)
Logeswari Poobalan (20438017)

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 SBF Assignment 2 Which stock should invest in?

Content
Task 2 .................................................................... 3
(i) ...................................................................... 3
(ii) ..................................................................... 4
(iii) .................................................................... 4
(iv) .................................................................... 5
Task 3 .................................................................... 6
ii)....................................................................... 6
iii) ..................................................................... 7
iv) ...................................................................... 7
v) ....................................................................... 7
vi) ...................................................................... 7
vii)..................................................................... 8

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 SBF Assignment 2 Which stock should invest in?

Task 2

(i)

Microsoft Apple

Mean 2.026348 Mean 1.730693

Standard Error 0.774963 Standard Error 0.841727
Median 1.827261 Median 1.886518
Mode #N/A Mode #N/A
Standard Standard
Deviation 6.002841 Deviation 6.519989
Sample Sample
Variance 36.0341 Variance 42.51025
Kurtosis 1.123873 Kurtosis -0.16009
Skewness 0.135776 Skewness -0.52847
Range 31.87481 Range 28.28335
Minimum -13.9547 Minimum -15.0731
Maximum 17.92014 Maximum 13.21023
Sum 121.5809 Sum 103.8416
Count 60 Count 60
-2E+283 -2E+283

Jarques-Berra Test
Microsoft Apple
Skewness 0.135776 Skewness -0.52847
Ex Kurtosis 1.123873 Ex Kurtosis -0.16009
df 2 df 2
JB 3.342074 JB 2.856922
Chi-square 5.991465 Chi-square 5.991465
p-value 0.188052 p-value 0.239678

Step 1 -
The null hypothesis is that the distribution is normal.
The alternative hypothesis is that the distribution is not normal.

Step 2 -
Level of significance is 0.05.

Step 3 -
If the Jarque-Berra value is higher than 5.99 we can reject the null hypothesis.

Step 4 -
Since neither of the Jarque-Berra values were higher than 5.99 we cannot reject null hypothesis.

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 SBF Assignment 2 Which stock should invest in?

We maintain the null hypothesis that both the distributions are normal.

(ii)

Step 1 - State the null hypothesis

The null hypothesis is that the average return for Apple is 3%.
The alternative hypothesis is that the average return for Apple is different from
3%.

Step 2 - State the level of significance

The level of significance is 5% or 0.05.

Step 3 - State which test statistic to use and why

Since the distribution is normal, we choose to use the normal z-test with known standard deviation.
z-test = -1.50798

Step 4 - Decision Rule

Since this is a two-tailed test,
We reject the null hypothesis if the observed Z value is less than -1.96 or higher than 1.96.

Step 5 - Conclusion
Since the observed Z value is greater than -1.96 we cannot reject the null
hypothesis.
Therefore, we maintain the null hypothesis that the average return for Apple is
3%.

(iii)

Hypothesis testing for Homoskedasticity

Step 1 - Hypothesis
Ho: Variance Apple > = Variance Microsoft
H1: Mean variance Apple < Mean variance
Microsoft

Step 2
Level of significance = 0.05

Step 3
F-Test Two-Sample for Variances

R_MSFT
(%) R_APPL (%)
Mean 2.026348265 1.730693482
Variance 36.03410349 42.51025127

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 SBF Assignment 2 Which stock should invest in?

Observations 60 60
df 59 59
F 0.847656798
P(F<=f) one-tail 0.263782891
F Critical one-tail 0.649368947

critical values
Probability distribution of F inverse (F_L) 0.597324477
Probability distribution of F inverse (F_R) 1.674131964
P-value 1.472434218

Step 4
Decision rule F>F_R, Reject H0

Conclusion
We can't reject null hypothesis which means the risk factor is more in Apple while comparing it to Microsoft.

(iv)

Hypothesis testing for two population means

Step 1
Hypothesis testing
H0: Mu Microsoft - Mu
H0: Mu Microsoft = Mu Apple Apple=0
H1: Mu Microsoft - Mu Apple
H1: Mu Microsoft <> Mu Apple <>0

Step 2
Level of Significance
Alpha = 0.05
Confidence interval = 0.95

Step 3
t-Test: Paired Two Sample for
Means

R_MSFT
(%) R_APPL (%)
Mean 2.026348265 1.730693482
Variance 36.03410349 42.51025127
Observations 60 60
Pearson Correlation 0.305112459
Hypothesized Mean Difference 0
df 59
t Stat 0.309757176
P(T<=t) one-tail 0.378918523
t Critical one-tail 1.671093032

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 SBF Assignment 2 Which stock should invest in?

P(T<=t) two-tail 0.757837046

t Critical two-tail 2.000995378

Confidence Interval for population parameter Mu Microsoft - Mu Apple

UCI
LCI Microsoft Microsoft LCI Apple UCI Apple
-
-0.015455714 0.663509627 0.01678723 0.720671261

Decision rule
Reject H0 if p-vale is less than 5%
JB > x^2v= 5.99

Task 3

ii)

Step 1: State the hypothesis

Null hypothesis: beta <= 1, not
aggressive
Alternative hypothesis: beta > 1, aggressive
Step 2: Significance level
alpha = 0.05 (5%)
Step 3: Test stastic test
Population variance is unknown
Sample number is above 30
use t test with t ~ N(0,1)
due to CLT we use critical values from the normal
distribution
t-test 0.03852
n = 59
Step 4: Decision Rule

Reject H0 if tObs > t1-𝛼,n-1

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 SBF Assignment 2 Which stock should invest in?

t1-𝛼,n-1 = 1.67 we reject null

hypothesis
Step 5: Conclusion
Since the t statistic is 0.03852, lower than 1.67, therefore we cannot reject null hypothesis
Therefore, we maintain the hypothesis that Microsoft's stock is not aggressive.

iii)

The Capital Asset Pricing Model (CAPM) is used to find the preferred stock based on
systematic risk in the stock market. In the report beta value is more than 1 (1.0095), which tells
that our preferred stock (Microsoft) is riskier to invest than other stocks. The difference from
1 is not too much which determines that the systematic risk in other companies are also not too
low comparing to Microsoft.

iv)

The linear regression model explains that increase in excess return on stock market by 1% will
increase the return of Microsoft by 1.0095%. which means that risk and return is more in Apple
while comparing with Apple.

v)

The result of coefficient of R²is 0.2238, which is 22.38%. This indicates that 22.38% of the
variation in Y can be explained by the variation in X on excess return of Microsoft on stock
market portfolio. The value of R²is low indicating that there is weak linear model, implies that
77.62% of variations of excess return of Microsoft are not explained by the model.

vi)

The capital Asset Pricing Model determines that the stock will be aggressive, if β> 1. To check
whether our preferred stock is aggressive or not, the first step is to set null and alternative
hypothesis.
Step 1: Hypothesis: H0: <= 1 (Stock is not aggressive)

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 SBF Assignment 2 Which stock should invest in?

H1: > 1 (Stock is aggressive)

Step 2: Significance Level: 0.05 or 5%
Step 3: Test Statistics: In the given data, the variance of the population is unknown, and
from the Task B we can understand that the data is normally distributed. So, as the data is also
more than 30, the best test statistic is students t-statistic.
The formula to calculate Student t-statistic is
tObs = X - / s/n
= 1.0095 – 1 / 0.2469 = 0.0385
Here the coefficient of slope is used as variance and standard error is used as denominator.

The P-value is determined in excel using formula =(1-NORM.DIST(0.0385,0,1,1) is 0.0001.

Step 4: Decision Rule: Reject H0 if tObs > t1-𝛼,n-1
t1-𝛼, n-1 = 1.67 we reject null hypothesis
Step 5: Conclusion: Since the t statistic is 0.03852, lower than 1.67, therefore we
cannot reject null hypothesis. Therefore, we maintain the hypothesis that Microsoft's stock is
not aggressive.

vii)

To assume the errors of the residual model, the normality testing is used. First step is to
determine the skewness and kurtosis values from descriptive statistics.
Descriptive statistics - Residual
Mean 2.36848E-16
Standard Error 0.682454963
Median 0.394178679
Mode #N/A
Standard Deviation 5.286273411
Sample Variance 27.94468658
Kurtosis 1.367224905
Skewness -0.01095788
Range 30.07155736
Minimum -14.05504721

Maximum 16.01651015

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 SBF Assignment 2 Which stock should invest in?

Sum 1.42109E-14
Count 60

Step 1: Hypotheses testing : H0: Normally distributed errors

H1: Errors are not normally distributed
Step 2: Significance level: a = 0.05 or 5%
Step 3: Test statistic: The appropriate test statistic to test for normal distribution is
the Jarque Berra test.
The result is 4.6744
The P- value obtained is 0.0965 using formula =CHISQ.DIST.RT(4.674460604).
Step 4: Decision rule: The decision rule for the Jarque Berra test is to reject the null if
the observed value of JB is larger than critical value. The critical value is 5.99
Step 5: Since the obtained JB value was less than the cirtical value of 5.99, we cannot reject
he null hypothesis. That’s means the error of residuals are normally distributed.