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Financial Modelling Report - Essay Example

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MN7024-Financial Modelling [University] [Instructor Name] Executive summary This project is aimed at establishing whether there is any relationship between stock return on one hand, and beta, book-to-market ratio, size of firm, as well as different regions of the world on the other hand…
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Financial Modelling Report
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Financial Modelling Report

In addition, regression analysis will be conducted to especially find out the patterns of the regression equations and the p-value. This will help support the null hypothesis that the predictors play some role in the stock return. A number of theories will be put forward to try and explain the results of the study. MN7024-Financial Modelling Introduction Return on stock is influenced by various factors, among them including the size of a firm, book-to-market ratio, and beta. In addition, different regions of the world have exhibited different patterns in regards to stock return depending on the prevailing market conditions during a particular time (Zhang, Shu and Brenner, 2010). In this project, it will be hypothesized that return on stock is subject to the size of the firm, the book-to-market ratio as well as beta; and that different regions of the world have different impacts on the stock returns, among them including America, Asia and Europe. Owing to the strong impact that 2008 financial crisis caused in the financial markets especially by exacerbating market volatility; this project will also compare the variable relationships before the crisis and after the crisis with the aim of finding out whether the crisis had caused any significant changes in the stock market dynamics. The analysis will primarily involve generation of line graphs, scatter plots, relationship tables, and use of regression analysis to compare the relationship between various variables. Analysis of regression statistics and scatter plots will be generated by SPSS while charts will be generated by Microsoft excel worksheets. The output generated from SPSS will be synthesized and presented in tables in a manner that is easy to read and understand. The dependent variable will be the return and the independent variables will include size of firm, book-to-market ratio, beta and three geographical regions including America, Asia and Europe. The three variables will be presented as dummy variables to enable multi-regression analysis. Consequently, number 1 will be assigned to the region that the sample has been obtained; and 0 will be assigned to the other regions that the sample has not been obtained. Graphical representation of data Beta and stock return Beta is used in CAPM to measure systematic risk or volatility of a particular security relative to the market as a whole (Zhang, Shu and Brenner, 2010). Therefore, the securities with higher beta have more risk than the market and many investors would not want to invest in them. However, it is widely accepted that the securities that have high return will also have a high risk. As such, from the figure 1 and 2 below, the beta is directly proportional to the stock return, meaning that as the beta increases, the return on stocks will also increase and vice versa. The essence of a higher return in the stocks with a higher beta is to compensate the investors for the higher risk they are exposed to. This relationship is not very strong where beta is very high because investors tend to accept low return from high beta considering that low beta securities require the use of leverage. From figure 2 below, the positive relationship between these two variables appears to be maintained. Figure 1: Return vs. beta before 2008 Figure 2: return vs. beta after 2008 The Book-to-market ratio versus Stock Returns Figure 3 and 4 below shows the return of stock compared with book-to-market. Studies undertaken by Fama and French (1992) ... Read More
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