Proposed project for Alchemy Inc
FIN 3150
Fall 2019
Assignment 8 - Evaluating sensitivity to risk
Part 1.
Select two companies that have stock prices continuously available for November 2014 through October 2019. Obtain monthly prices for each company (end of month) for that period.
If you obtain prices from yahoo finance, you will get end of month prices if you request “monthly” prices even though the date indicates first of month. Use the adjusted closing price. If you use another source for stock prices, be sure you use the price on the last trading day of the month for the calculations in this part and adjust returns for stock splits and dividends
For each stock, select one of the economic variables for which data is available in the “monthly” sheet in the file “assignment 8 data.xlsx”. (Use a different economic variable for each stock.)
1. Compute monthly returns for each stock and percentage changes for each selected variable.
2. Use a single variable regression to determine the sensitivity of each stock to the economic variable selected.
Note: For construction spending or vehicle miles traveled, you will not be able to use all the stock returns. For these, use only returns for dates where there is a co
esponding value for the percentage change in the underlying variable.
Interpret the regression results for each stock and economic variable. That is, indicate the following for each stock and selected economic variable:
3. How a 1% change in the economic variable is expected to affect the value of the stock.
4. Whether the relationship between the economic variable and the stock is statistically significant (and explain how you make that determination).
5. Whether the stock’s natural risk associated with the economic variable is long or short.
6. How much stock return volatility can be eliminated if the risk associated with that economic variable is entirely eliminated.
Part 2.
Select two companies that have stock prices continuously available for November 3, 2014 through November 7, 2019. Obtain daily prices for each company for those dates. (You may use the same companies from part 1.
For each stock, select one of the economic variables for which data is available in the “daily” sheet in the file “assignment 8 data.xlsx”. (Use a different economic variable for each stock.)
7. Compute daily returns for each stock and percentage changes for each selected variable.
8. Use a single variable regression to determine the sensitivity of each stock to the economic variable selected.
Interpret the regression results for each stock and economic variable. That is, indicate the following for each stock and the selected economic variable:
9. How a 1% change in the economic variable is expected to affect the value of the stock.
10. Whether the relationship between the economic variable and the stock is statistically significant (and explain how you make that determination).
11. Whether the stock’s natural risk associated with the economic variable is long or short.
12. How much stock return volatility can be eliminated if the risk associated with that economic variable is entirely eliminated.