MAIN PURPOSE
The purpose of this assignment is to make students familiar with some with the basics of time series analysis and forecasting.
SCENARIO
You are a Junior Stock Analyst for F&H Investment Plc, with responsibility for tracking FTSE 100 stocks on the London Stock Exchange. One of your core duties is to determine the right price and return of stocks, which in turn, informs traders on buying or selling decisions of the stocks in their portfolio.
The asset returns/pricing model used is the capital asset pricing model (CAPM), which proposes the market (systematic) risk as the single determinant of stock value.
The CAPM is estimated using the following empirical model
R_(i,t)-r_(f )= α_i+ β_i (R_(m,t)- r_f) (1)
where, i= 1,…, N and t=1,…,T
R_it = return on asset i at time t (your selected stock, e.g., Barclays)
r_f = return on the risk-free asset at time t (UK govt three (3) months Treasury bill price)
R_(m,t)= return on the market portfolio at time t (FTSE 100 Index)
α_i and β_i are the coefficients to be estimated.
Your task for the month is to produce a report detailing the time series pattern, return analysis and forecast of a stock that is a constituent of the FTSE 100 index (refer to list of FTSE 100 firms). The main body of your report should be structured based on the following sections.
Time Series Analysis
Stock Returns Analysis
Forecasting
Below are detailed requirements for each component of your report.
PART ONE: TIME SERIES ANALYSIS
Produce a time-series graph of the monthly price series for (i) the selected stocks, (ii) the risk-free asset and (iii) the market portfolio, for the past 15 years.
Provide a description of the patterns observed for your series plots, that is, whether you observe a trend, season, cycle, structural break, random walk or a combination of them).
Identify an economic/fundamental reason for the patterns observed in each of the series analysed above.
[20 marks]
