MACRO ECONOMETRICS (ECO 402S) GROUP PROJECT

ANALYSING THE CHARACTERISTIC LINE OF MODERN INVESTMENT ANALYSIS

A) Regression Analysis and Interpretation

The characteristic line of modern investment analysis (market model) involves running the following
regression

Rit = 1+2Rmt + ut

where Rit = rate of return on a stock or share

Rmt = rate of return on the market portfolio
t = time

Find the monthly historical data on individual stock prices over the last 5 years for 4 Malaysian
companies. Use the FBM KLCI Index to represent the market portfolio for the same period. (Note you
must convert the prices and index into returns using the growth formula).

[Refer to article on BB on how this is done]

Repeat using stock prices of 2 US companies and use the S&P 500 to represent the market portfolio.

[You may obtain your data from this source : https://www.investing.com

Search for historical data to see stock prices over your selected frequency (daily, monthly etc.) and time
period i.e. start and end date)

For each stock, run a regression of stock returns against market returns and carry out the following tasks

 Plot a scatter diagram between Rit and Rmt

 Write out the estimated regression function
 Test the individual and overall significance and the overall fit of the model.
 Identify any problems of autocorrelation and heteroscedasticity
B) Report Structure
Your report must consist of the following:

Introduction
Explain the importance and the use of the market model in finance.
Carry out a brief literature review on the market model (At least 6-10 literature review, literature reviews
must be from journal articles)
[Note : Refer to the example of a literature review on BB]

Findings
Based on your regression results in A) summarize your results into comparison tables for the companies.
Comment.

Conclusion
Are stock returns best explained by market returns? Suggest other possible explanatory variables or
models from your literature review which may explain stock returns and explain how you would
incorporate this into your model in A)

Appendix
Data for the companies and market
Regression output
Any other output

Bibliography (Reference List)

C) Other Guidelines
Your report should not exceed 3000 words excluding the appendix and bibliography. This is a group
project and each team member is expected to contribute their part to ensure the completion of this project.
At the end of the project, you are required to rate and evaluate yourself and your team mates’
performance.
 RUBRICS FOR GROUP PROJECT

TOTAL
INTRODUCTION 20
Introduction & Literature Review

CONTENT 20
Summary table for findings &
comment on the results

CONCLUSION & 10
RECOMMENDATIONS

APPENDIX 50
scatter diagram 1 x6 6
estimated regression function 1 x6 6
Tests for individual and overall 3 x6 18
significance and goodness of fit
Test for autocorrelation and 2 x6 12
heteroscedasticity

Data & Returns 4

Regression Output 3

REFERENCE LIST 1