QUANTITATIVE METHODS IN FINANCE | My Assignment Tutor

RMIT Classification: TrustedECON1095 QUANTITATIVE METHODS IN FINANCEAssignment 2 is due Sunday 30th May and contributes 40% to the assessment of this course.INSTRUCTIONSPlease up-load a word or pdf file with both your name and student number of each group member on thefirst page, and then submit a supporting Excel file that contains your workings for all of the analysis that isreported. Use your group number as the file name. Only one assignment is to be submitted per group.Part A:Use the data ECON1095 Data Sem 1 2021 to complete the questions in Part A (available on Canvas).QUESTION 1In the Excel file ECON1095 Data Sem 1 2021 you will find monthly data from 1990 to 2021 on several internationalshare price indices. (a)(b)Using the entire sample graph the US and Hong Kong indices both as levels and continuous returns.Use Excel’s Data Analysis to find the Descriptive Statistics for the continuous returns (log returns) forboth the US and Hong Kong share markets.What are some of the major international events that affected these two markets over this time? Referringto these events and using your graphs in part (a) and the descriptive statistics from part (b), compare andcontrast the performance of these two share markets over this period.(c) (3 marks)QUESTION 2Again, using the Excel file ECON1095 Data Sem 1 2021 and the complete sample: (a)Calculate the continuous returns for each of the International share price indices and then find the averagecontinuous returns for each for the whole period.Which market has the highest and which has the lowest average returns?Calculate the standard deviations for the continuous returns for the international share price indices forthe entire period. Which market is the riskiest?Graph the highest returning market against the Australian market for the entire period, then on a separategraph do the same for the lowest returning market, then on a third graph do this for the riskiest market.(4 marks)(b)(c)(d) QUESTION 3Although Hong Kong market had experienced large extend of uncertainty, often such things can also provideopportunities for investors. As a first step, an investor considering the Hong Kong share market, examines the longterm continuous returns for the Hang Seng. Use Excel’s Data Analysis/Descriptive Statistics to find the Hang Sengmonthly returns from start of 1991 until March 2021.(a) Calculate the 95% confidence interval for the monthly returns for the Hang Seng over this period.2RMIT Classification: Trusted(b) As the investor is concerned about the possibility of negative returns, test to see whether the averagemonthly returns for the Hang Seng are less than or equal to zero.1 Making reference to this hypothesistest, briefly discuss whether the investor should be worried about the possibility of negative returns ifthey invest in the Hong Kong share market. Discuss type 1 and type 2 error and how they may relate tothis hypothesis test.(c) Test to see whether the monthly returns on the Hang Seng over this period are normally distributed usingthe Jarque-Bera test. This should be done in Excel, by calculating the Jarque-Bera statistic using theformulas from the notes and Data Analysis/Descriptive Statistics.2 Using the results of this test, commenton the accuracy of the probabilities calculated in parts (a) and (b) of this question.(d) Calculate and comment the skewness of the Hang Seng monthly returns over the sample period. Explainwhy this is the case and the implications for investment decisions.(e) Using the continuous returns on the Hang Seng, determine whether the rises and falls are independentusing a runs test. What are the implications of your findings?(15 marks)QUESTION 4Next the investor would like to look at the long-term relationship between the Hang Seng and the United State S&P500 (US). Using the same time-period as in QUESTION 1: (a)Examine the connection between the Hang Seng and US using a series of graphs. Please do a few graphs,both as levels and returns and as XY and line (time series) graphs. Does it look as though the Hang Sengand US are dependent or independent?Calculate correlation coefficients between the Hang Seng and US (data analysis, correlation). Again, do(b) this both for the levels and returns. Please interpret the coefficients and offer a brief explanation for theirvalues.(c) Using the same data fill in the following table for the number of rises and falls3. Hang SengUSRiseNo changeFallTotalRiseNo changeFallTotal (d) Calculate the joint probability distribution and the marginal probability distributions for the data.(e) Using your previous answers as a guide, comment on whether the Hang Seng and US appear to bedependent or independent?(f) Due to the continued fall-out from Covid-19 the expectation is that US returns will fall again during2020. Calculate the conditional probability distribution for the Hang Seng given that the US hasdecreased. Explain how this calculation could be used to guide investment decisions.(12 marks)1 Use a level of significance of  = 0.05 for this and all other tests in this assignment.2 Note that when Excel calculates kurtosis it subtracts 3 from the value.3 The IF function in EXCEL is very useful when completing this table.3RMIT Classification: TrustedQUESTION 5Use regression to look at the relationship between returns on the Hang Seng and US over the same period used in theprevious questions. That is, estimate Hang Sengt = 0 + 1USt. Two approaches should yield the same answer. Thatis:(a) Use the solver to find the values of 0 and 1 that minimizei=1nei2.(b) Use Excel’s regression function to confirm the results in parts (a).(c) Next, evaluate these results by:• Interpreting the coefficient of determination and the F-statistic.• Conduct a t-test on the slope coefficient.• Briefly explain the implications of these findings.(8 marks)QUESTION 6Now the investor would like to know how various major international events affected these different share markets inthe past – as this may provide a guide as to what could happen in the future. Given the size of the American economythe returns on US shares may be considered equivalent to the market returns, therefore can be used to estimate themarket model for the other share markets.(a) Estimate the the systematic risk or betas for each of international share markets with respect to the US market.Do this using excel’s regression function to estimate the market model: Rit =  + 1RUSt , where i refers tothe other nine share markets. Interpret the coefficient of determination, the F-statistic and the size andsignificance of the slope coefficients.(b) Conduct t-tests against unity for the betas to determine if these share markets would be considered ‘passive’,‘aggressive’ or ‘neutral’ relative to the US.(a) Construct event dummy (or binary) variables to represent three international events that may have affectedthese markets:(i) The Asian financial crisis – one from Aug 1997 to Jul 1998, zero otherwise.(ii) The Global Financial Crisis (GFC) – one from Feb 2007 to Feb 2009, zero otherwise.(iii) Covid-19– one from Jan 2020 to Mar 2020, zero otherwise.Re-estimate each of your market models for the international share markets with the addition of these eventdummy variables as both intercept and slope coefficients. Evaluate these new models using the significanceor otherwise of these dummy variables to identify how the international events affected the share markets.Briefly discuss your results.(15 marks)4RMIT Classification: TrustedPart B:Hypothetical Details:Your group is one of the equity investment team in the Melbourne Sports Superannuation Fund. Currently, you areabout to initiate a review of your investment strategy, simulation model and risk measurement using the last 5-yearhistorical data. The procedure is as below:Portfolio formation: 1.Your team has $A amount of budget:$