7SSMM700 Quantitative Methods for Finance 2023/4
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Assessment Format: Coursework 2023/4
Module code and title: 7SSMM700 Quantitative Methods for Finance
Examination Period: Period 1, November 2023
Time allowed: The paper will be available from 10:00am on 10th November 2023. Students will need to submit their answers by 10:00am on 11th December 2023.
Word count: Students should not exceed more than 3000 words for this paper. References excluded.
INSTRUCTIONS TO CANDIDATES:
1. Answer ALL the questions.
2. A template answer sheet has been provided on the KEATS page, you should complete the cover sheet and then write your answers to the questions below.
3. Paste any required diagrams and graphs for your answers directly onto the answer sheet using software or uploaded photos.
4. If you answer more questions than specified, only the first answers (up to the specified number) will be marked.
5. Use the Harvard referencing style.
6. If you have a PAA cover sheet, you should include this in addition to the template answer sheet
7. Save your work regularly, at least every 15 minutes.
ONLINE SUBMISSION INSTRUCTIONS:
1. Your answer sheet should be submitted via the Turnitin submission link on the module KEATS page.
2. Ensure your document is submitted through Turnitin with the title CANDIDATE ID – MODULE CODE- e.g. AE12345-7SSMM700
3. Once submitted please check you are satisfied with the uploaded document via the submission link.
4. If you experience technical difficulties and are unable to upload your assessment by the deadline, please collate evidence of the technical issue and submit a mitigating circumstances form (MCF). Remember that the evidence must clearly show timestamps and proof that you attempted to upload your assessment before the deadline.
SECTION A - ANSWER ALL QUESTIONS
Instructions:
Login in on Keats.
Click at the followinglinkand download the dataset_coursework.dta,
Data has been collected from Yahoo Finance. They range from January 1990 to the end of August 2023 with a daily frequency.
In Column 1, we report the “date” .
In Column 2, the variable “r_market”, is the return of the market portfolio.
In Column 3, the variable “rfr” is the daily return for the Treasury bills, the risk-free asset.
In Column 4, “hml” is the average return of the stocks in the high market-to- book portfolio minus the return of the stocks in the low book-to-market portfolio.
In Column 5, “smb” is the average return of stocks in a portfolio formed by small market capitalization companies minus the average returns of stocks in the portfolio formed by big market capitalisation companies (see Figure 1).
Data have been collected from the Kenneth French’s Data Library website and the full description of the above variables is available at the following link. From Column 6 onward, you find the price for about 240 stocks listed in the S&P500.
Figure 1
Choose any one asset.
Answer the following questions:
a. Present the Capital Asset Pricing Model (CAPM) and discuss how the theoretical model is made operational when going from the theory to the empirical practice. (10 marks)
b. Estimate the CAPM model using the data. Report and discuss the results and whether you believe the estimate you have obtained is appropriate. (10 marks)
c. Test the hypothesis that the asset is in equilibrium. Present the testing procedure, report the result of the test, and discuss the decision you take. (10 marks)
d. Assume you hold a portfolio. Would you buy the asset under examination if your aim is to make the portfolio you hold risk neutral? Discuss. (10 marks)
e. Present and discuss the Fama and French (1993) three factors model. Estimate the Fama and French (1993) three factors model using the data and discuss the results. (20 marks)
f. Compare the results for model under question (e) with those from the model under question (b). What is the preferred model, and why? Discuss. (20 marks)
g. Discuss the relationship, if any, among the models you have estimated in point (b) and (e) with the index models. (20 marks)
2023-11-20