25721 Investment Management Assignment Autumn 2015
An Application of the Single Index Model
Preamble
This individual assignment is worth 15% of your final grade. The aim of this project is to expose the student to:
(i) acquiring data;
(ii) contemplating subtleties in financial data such as stock splits, dividend payments and yield differences on short-dated debt instruments in Australia;
(iii) applying simple regression techniques and interpreting the output in terms of a financial model (SIM) as a template for the more complex factor models used in industry; (iv) Understanding the risks in model driven trading.
This project provides an opportunity to sharpen your report writing skills and improve abilities to explain complex ideas. The due date for this assignment is 5pm, Friday 8 May, 2015.
Task list
You should complete all eight tasks below before writing your report. You should document your work for each task and maintain your Excel spreadsheet with a view to writing the final report.
Task 1
Go to the ASIC website (http://www.asic.gov.au/) and read the ‘About ASIC’ section so you know a little about what they do. Now go to this part of the ASIC website and read Regulatory Guide 196; http://www.asic.gov.au/asic/asic.nsf/byheadline/Short-selling-reporting?openDocument (if this link doesn’t work with a click then copy and paste it into your browser).
Task 2
On the web page in Task 1, click on ‘View table of short position reports’. Within the table titled ‘Daily aggregate short position per stock’ find and download the daily short sales data (CSV file) for
March 2, 2015. Save it as a new spreadsheet called AsicSortedShortSales. Sort this data so that the stocks that have the highest number of reported short positions are at the top (see ‘Reported Short Positions’ column) and save your work.
Task 3
Visit http://help.yahoo.com/kb/index?page=content&y=PROD_FIN&locale=en_US&id=SLN2311 and read about how stock prices (and therefore returns) are adjusted for splits and dividends. The approach here is used by most data providers.
You will be working with two stocks for the assignment. One is from your AsicSortedShortSales spreadsheet the other will be BHP.AX or NAB.AX. The data you will work with is based on your student number.
(i) Take the last digit of your student number and identify the corresponding shorted stock in your sorted spreadsheet (AsicSortedShortSales). E.g., if your student number ends in eight (e.g. 9917568) you must identify the eighth (8th) most shorted stock (by reported position).
(ii) If the second last digit of your student number is EVEN then you will be working with
NAB.AX. Otherwise, if the second last digit of your student number is ODD then you will
need to collect data for BHP.AX. Take care with this as significant marks will be lost if you fail to acquire the correct data.
You will collect monthly price data for both your stocks from au.finance.yahoo.com. For this assignment we will be using price data spanning January 2013 to January 2015 (a total of 24 months of return data). Save this data in an Excel file called ‘SIM’. If your stock has data beginning after January 2013 then please use the data that is available up to January 2015. In this case you should investigate why this might be.
Place the data for your two stocks in different tabs in your SIM spreadsheet and label the tabs by their stock code. You will need to sort the data by the date column (oldest to newest).
Tip: Here is an example of collecting the data for NAB (NAB.AX). You will need to change the dates and the stock. The data file can be downloaded from the link at the bottom of the following web page. http://au.finance.yahoo.com/q/hp?s=NAB.AX&a=00&b=29&c=1988&d=02&e=27&f=2013&g=m .
Task 4
Now determine the monthly return series for both stocks using the adjusted close prices. Keep this data within the tab. You can delete the Open, High, Low, Close and Volume data as we won’t be using this in the assignment. What is the mean and standard deviation of the returns for your two stocks?
Task 5
Visit yahoo finance again and download the monthly price data for the S&P/ASX-200 Index (^AXJO). Place this data in a separate tab on your spreadsheet and calculate the monthly returns.
Task 6
Now go to the RBA’s website (rba.gov.au) and download the monthly yields for bank-accepted-bills. Visit http://www.rba.gov.au/statistics/tables/index.html#interest_rates and choose ‘Interest Rates and Yields – Money Market – Monthly F1 [XLS]’
Ideally we would use this one-month Treasury Note data (FIRMMTN1) but there are gaps in this data. So we will use the 30 day bank-accepted bill as a proxy (FIRMMBAB30). Note that these rates are quotes as per annum rates.
Task 7
What are the differences between a bank-accepted-bill (BAB) and an Aust. Gov. Treasury note? Which would you expect to have the higher yield and why? What happens to these yields in a banking crisis? Can you find evidence on the RBA website to support your view?
Task 8
Conduct a Single Index Model regression for your two stocks return using the 30-day BAB as the riskfree rate. Use the S&P/ASX-200 Index as the market index. You should take care to make sure the data is correctly aligned. The Bank Bill yields are expressed as a percentage per annum. These will need to be converted into a monthly rate (divide by 1200). Include the regression results in each tab along with a graph of the SCL. You can get Excel to output the graph in the regression stage.
Form a table in a new worksheet called ‘Results’ that has the columns labelled (alpha, beta, standard error, ) and has rows labelled for your two stocks. Compare and discuss the alphas and betas you have found. The fact sheet for the S&P/ASX-200 index (found at http://au.spindices.com/) might be useful.
Your report
Your written report must not exceed FIVE A4 pages including the cover page. A template for the cover page will be provided on UTS online. Fonts must not be smaller than 11pt and the margins should be conventional (2.54cm). Your report MUST be structured as follows and address the questions raised.
1. Introduction (1 mark)
Write an explanation of what your report does and briefly summarise the findings. This MUST NOT exceed 50 words and cannot contain formulae.
2. Stocks Analysed (1 marks)
Create a table containing the TWO stocks. Your table should identify the stock code, company name, relevant industry (sector) groups, the average return and the standard deviation of the returns. Which of your two stocks do you think is the most inefficiently priced? Why?
3. Data and the Risk-Free Asset (2 marks)
Note the sources for your data and how adjustments for dividends and stock splits have been made. You should also discuss the suitability of the instrument you have used for the risk-free asset.
4. The Single Index Model (2 marks)
Write down the SIM and fully define/explain all terms.
5. Regression Results and Interpretation (3 marks)
Present the table from task 8. The table must be self-contained, clear, and documented. This means there should be no need to look outside the table in order to interpret the results. Compare and discuss the alphas and betas you have found. Determine the systematic risk and idiosyncratic risk in each of your stocks. Interpret the quality of your regressions. Why might the betas differ to the betas found from other sources (such as Bloomberg)?
6. Trade Idea and Risks (4 marks)
Consider the stock that you are working with that appeared on the sorted reported position list. Assuming no margin requirements, explain how you might construct a statistical arbitrage between this stock and an S&P/ASX-200 index ETF. Your answer must show the weights for all investments and discuss the risks on this trade. All working must be presented.
The final two marks will be awarded for presentation and clarity and how closely you have followed the instructions (2 marks).
How and what to submit
You must submit your work through UTS online. An electronic system will be used for the detection of plagiarism. The due date is 5pm, Friday 8 May, 2015. In fairness to all students, late submissions will attract a reduction of 5 marks per day. You must submit:
(i) One Excel spreadsheet which must clearly identify all data and results. It should contain the data used in the written report. It should support your report and will be considered in the presentation component of the assessment. Your report however cannot ask the reader to
‘see spreadsheet.’ Failure to submit the Excel spreadsheet that supports your work will result in a 50% reduction in your mark.
(ii) One written report in both Word and PDF format. Any graphs you have in the written report must be contained within the Excel spreadsheet.
Marking scheme
This marking scheme will be applied in marking your assignment.
Item Mark
1. Introduction /1
2. Stocks Analysed /1
3. Data and the Risk-Free Asset /2
4. A Single Factor Model /2
5. Regression Results and Interpretation /3
6. Trade Idea and Risks /4
Presentation & Clarity /1
Followed instructions /1
If spreadsheet not submitted deduct 50%.
If data not correctly sourced deduct 50%
If late, subtract 5 marks per day
Total /15
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