EC3114 Financial Economics I

Autumn 2022
Coursework
(20% of total grades)

Instructions
The Excel File named “Data Set for Autumn 2022 Coursework” in Moodle contains the
adjusted closing prices for 15 big US companies at the beginning of the month, the monthly
market risk free rate and the monthly return on the market portfolio. The risk free rate and
market return data come from Kenneth French’s website. The market portfolio is a huge
portfolio constructed with all assets traded on the US stock exchanges.
The data runs from May 2016 to September 2019 – there are 41 closing prices for the firms,
and 40 data points for the risk free rate and the market rate. When you calculate returns, you
will obviously have 40 returns to match the 40 market returns. We avoid data after September
2019 to exclude the various turbulences caused by the pandemic and the war in Eastern
Europe.
For the Coursework, you are required to:
i) estimate the single index model for each of the firms (ie, 15 estimations)
ii) form an equally weighted portfolio with the 15 firms and estimate the single index model
for the portfolio.
Provide all the summary statistics for all firms, market portfolio and equally weighted
portfolio; and for the single index models. Report your results in a nicely drawn table (Do not
copy and paste the tables from Excel).
Interpret the R-square for the single index model for individual firms, and the R-square for
the single index model for the equally weighted portfolio. Compare and contrast the R-
square.
Discuss what happens to idiosyncratic risk when you move from investment in an individual
firm to an equally weighted portfolio.

Further, do the following:

iii) Run a second-pass regression, with the 15 betas estimated from the single index model as
an independent variable. Your dependent variable should be the mean of the excess return of
each firm. (That is, you will have 15 mean excess returns, and 15 corresponding betas).
Produce a scatter plot (without a line) of beta vs mean excess return. Now, report the
regression result, and interpret your results. What should the intercept be? What is the
coefficient of beta from this regression, and what should we value should we expect it to be?
What are you estimating here?
All these analyses can be done in Excel, and I highly recommend it. (You are welcome to use
any other software or programme that you are familiar with).
Make sure that the written report is your own individual work and that you do not use
external help. Do not copy from anyone or anywhere. Do not solicit someone else to write
your assignment. You should include a reference section at the end of the essay, and use an
appropriate style of referencing to write it out. Wikipedia is not an acceptable source of
reference and you will be penalised for including it in the reference section. Please write
clearly, and avoid long sentences that confuse the reader. Structure your essay so that it is
presentable and flows nicely, with clearly labelled tables and charts (if any). Do not simply
copy and paste charts and tables form Excel and other programmes. Re-structure them, and
rewrite your tables in Word. Clearly explain methodologies and functions you use in Excel or
other software. Explain what you are doing, and what your results say.
Write a conclusion summarising what you did, and how your calculations prove or disprove
the evidence we have seen so far.
Keep the essay in the 1,200 word limit excluding charts and tables. (Do not upload the raw
data in the essay).
Submit the essay in Turnitin, in the slot provided in Moodle, by 10:00 h on Thursday 8th
December 2022. (There is a penalty for late submission). Start early as there are many
calculations to be performed. Please avoid waiting till the last minute to submit, as this is
exactly when things tend to go wrong.