The relationship between stock returns and Market Value

The Primary goal of the project is for students to gain comfort in using statistical software packages to conduct an empirical analysis of a particular firm. Specific goals are for students to (1) become familiar with sources of economic and financial information and in particular the Wharton Research Data Services (WRDS) Database, (2) practice their writing skills, (3) develop hands on, statistical estimation and modeling skills using excel (e.g., data analysis, regression analysis). The project is an individual assignment and late submissions will not be accepted. Please provide explanations for answers to all questions.

Background material: Chapter 4, 5 in McGuigan, Moyer and Harris

Data collection from WRDS database

Using your web browser, please go to the WRDS URL (http://wrds.wharton.upenn.edu) and collect data on the variables for the risk free rate, small minus big, high minus low, and the excess market return for the firm your selected. When you collect the data, please select the monthly frequency and the range spanning from 1980 through 2017. Using your class notes and the descriptions provided by WRDS, please provide a brief description of each variable included in the study. Please save these variables in an excel spreadsheet. Please download and save stock prices for your firm spanning the same period and at the monthly frequency. Please compute

stock price returns as the ratio of the change in the stock price for each period with respect to the previous period to the value in the previous period This will serve as the base case from which we will complete the rest of the project.

Regression Analysis

For this question, you will need the data analysis tool pack in excel.

Please, separately, determine the estimated regression line for a regression with the stock return as the dependent variable and the following list as independent variables:

1. Excess market return
2. Small minus big
3. High minus low
4. Please determine the estimated regression line with the stock return as the dependent variable and the risk free rate, excess market return, small minus big, and high minus low as the independent variables in one single regression model.
5. Which regression coefficients are statistically significant? Is the overall model significant?
6. What is the adjusted R-squared for the model? How does it compare to the adjusted R-squared for each model estimated in a? Is your answer to part b different from your answers to part a? Why or Why not?
7. Forecasting
8. Using only data covering the period 1980 through 2000, please determine the estimated regression line with the stock return as the dependent variable and the risk free rate, excess market return, small minus big, and high minus low as the independent variables in one single regression model.
9. Please use the model to predict stock price return from 2001 to 2017 and compute the root mean squared error using the deviation between the actual stock price return over this period and the model-predicted stock price return over the same period.
10. Discussion

Using your web browser and your own judgement and your class notes, please interpret and discuss the strength of the relationship between stock price returns for your firm and each of the three variables. In particular, please consider whether or not you think that the three variables do a good job in explaining and predicting stock returns for your firm. Please also explain why you think the model produced all results from questions 2 and 3 that it did