Indian Institute of Management Bangalore

PGP 2009-2011 Batch

Assignment for Quantitative Methods For Management 105

Weightage: 20% Submission Deadline: September 10, 2009

Instructions: Please state the assumptions clearly. Please submit your assignment as a
hard copy to the PGP office. Please note that it will not be possible to extend the
submission deadline under any circumstances. Only those assignments submitted by
the deadline would be evaluated, others will be awarded zero. Assignments should
reflect own effort; for any degree of copying, all students involved will be penalized
severely.

The data file stockprice.xls contains data on daily stock prices of some stocks as well as the
Nifty index values. Based on this data set, answer the following questions for any three stocks
(index). All the queries are about some characteristics about the daily/monthly/yearly returns of
your chosen stocks. You need to consider daily, monthly as well as yearly return for one of the
chosen stocks; for the other 2 stocks, you may select either.

Please note that the data are not dividend adjusted. If you wish you may adjust them.
However, for the purpose of this assignment the adjustment is NOT required.

Part 1: (suggested time-line - week 1)

1. Compute all necessary descriptive statistics for the daily/monthly/yearly return of

your selected stock prices. Interpret your computed results.

[Hint: Daily return = (Today’s price – Yesterday’s Price)/Yesterday’s Price; Monthly

return = (Today’s price – Price, 22 days ago)/ Price, 22 days ago; Yearly Return =
(Today’s price – Price, 240 days ago)/ Price, 240 days ago. You may find it confident
to number the days consecutively as Day No 1,2,3,…. to facilitate this.]

2. Draw a frequency distribution and plot the histograms of daily/monthly/yearly

returns. What can you say about the distributions of daily/monthly/yearly returns?

Part 2: (suggested time-line - week 2 -- week 4)

3. Using the frequency distribution of daily/monthly/yearly returns, answer the

following questions:
a. What is the probability of i) a positive daily/monthly/yearly return (gain)?
ii) a negative daily/monthly/yearly return (loss)?
b. What is the probability that there will be a loss of more than 10% after one
month/year?
 c. What is the probability that there will be a profit of more than 15% after
one month/year?
4. If today’s return is 5%-10%, what is the probability that return of after one
moth/one year will a) also be between 5%-10%? b) will be more than 5%? c) will
be more than 10%?
5. Assuming the distribution of daily return to be normal, answer Q4a, Q4b and Q4c.
Compare the results and comment.

Part 3: (suggested time-line - week 6 -- week 9)

6. Find a 99% confidence interval for the average daily/monthly/yearly return.

7. Test the hypothesis that the average daily/monthly/yearly return is more than
10%.
8. Find a 95% confidence interval for the proportion of time when the
daily/monthly/yearly return exceeds 10%.
9. Test the hypothesis that 90% of the time the daily/monthly/yearly returns exceeds
10% at 2% level of significance.
10. Assuming standard deviation to be a measure of risk, compute a 95% confidence
interval for this risk measure for daily/monthly/yearly returns.
11. Test whether two of your stocks yield same average (daily/month/yearly) returns.
12. Compute a 95% VaR (95th quantile of the distribution of negative of daily returns)
for the top three high-risk stocks assuming the daily/monthly/yearly return
distribution to be normal.
13. Count the number of days when VaR is exceeded during the last six months in the
data set and comment on the effectiveness of the VaR estimate.

Part 4: (suggested time-line - week 10 -- week 11)

14. Test if the assumption of normality of the daily/monthly/yearly return distribution

is valid.
15. Construct a two-way table showing the number of days (frequency) the daily
return was within various ranges across five different days of the week. Using this
table, test if the daily return varies across the days of week or not.

16. Write a brief summary of all your findings on the basis of the above analysis.