Mobil Exxon Economic Assingment Help With Solution

Finance theory suggest that αj = 0 under market efficiency. This is because αj represents excess profit or loss when the market excess return rm – rf = 0. That is, if αj > (<) 0, the stock consistently outperforms (underperforms) the market. However, if the market is efficient, this profit (loss) should disappear rather quickly by arbitrage.

1. Test the null hypothesis that αj = 0 for Microsoft, against an appropriate alternative hypotheses.
"Tech stocks typically have higher beta. An example is the dot-com bubble. Although tech stocks did very well in the late 1990s, they also fell sharply in the early 2000s, with a much worse decline than that of the overall market."

2. The above statement implies that Microsoft (a Tech stock) is an aggressive stock. Evaluate this claim by conducting an appropriate test on their β values.
"Mobil-Exxon" is an oil company with stable business conditions and should be a safer investment than the overall market"

3. The above statement implies that Mobil-Exxon is a defensive stock. Evaluate this claim by conducting an appropriate test on its β.

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4. Show your working for all confidence intervals above.

5. Interpret the 95% confidence intervals for GE, GM, and Disney, paying attention to their risk profile (aggressive, defensive, neutral)
It is supposed that, for January 2009, the market return (rm) is expected to be either 0.05 (5%) with the probability 0.5; or -0.05 (-5%) with the probability 0.5. Assume the risk-free rate to be 0 and α values to be 0.

6. Calculate the expected returns and standard deviations from Microsoft and Mobil- Exxon stocks for January 2009. If you wish to minimize your risk (measured by standard deviation), which stock would be your preferred investment?

7. An investor is seeking your recommendation to invest in three stocks among the above. Her goal is to form a portfolio of three stocks with well-diversified risk profiles. State your recommendations and justify your choice in relations to the properties of β values found above.

“Using beta as a measure of relative risk has its own limitations. Most analysts consider only the magnitude of beta. Beta is a statistical measure and should be considered with the model’s goodness-of-fit (R2 value of the regression). Higher R2 value implies a stronger relationship between stock return and market portfolio.”

8. Critically evaluate the merit or otherwise of the above statement by commenting on the R2 values of the estimated CAPM regressions above

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