Stock Price Analysis Part 2

Section 1 Regression Analysis in Excel

Regression Output for Your Stock should Look like the following:
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.656049966
R Square
0.430401558
Adjusted R Square
0.420580895
Standard Error
0.043602998
Observations
60
ANOVA
df
Regression
Residual
Total

Intercept
S&P Composite

SS
1
58
59

0.083323161
0.110270843
0.193594004

Coefficients
0.004733049
0.821580122

Standard Error
0.005855456
0.124103322

MS
0.083323161
0.001901221

t Stat
0.808314348
6.620130001

Significance F
43.82612123 1.26998E-08

P-value
Lower 95% Upper 95% Lower 95.0%
Upper 95.0%
0.422212758 -0.006987919 0.016454018 -0.00699 0.016454
1.26998E-08 0.573160334 1.069999911 0.57316
1.07

1) Interpretation of the R-Square estimate from my statistical pricing model:

With an r-square value of around .43, the TRV stock in not correlated very highly with the S&P
Composite. This means that changes in the S&P will not result in a very similar change in the return of
TRVs stock. More basically, the returns of these stocks to no vary together in a very consistent
manner, which can result in this stock being used as a decently effective way to diversify your risk
from the market portfolio.
2) Calculation of the systematic risk, the firm-specific risk, and the total risk of Dell Stock:
Systematic Risk is simply the variance of the market using the VARP formula = 0.002057381
The Firm-Specific Risk is calculated by subtracting Beta squared times variance squared from the
variance of the TRV stock and then dividing by the variance of the TRV stock = 0.482559197
Total Risk on TRV Stock is the variance on the expected returns using the VARP function =
0.003226567

3) Confirmation of the R-Square from the regression model:

R-squared =the alpha of your stock + (the beta of your stock * expected return of the market) which is
.0047 +(.8216*.5181) = .4304
4) Confirmation of the Beta estimate from the regression model using the statistical equation for
Beta:

The Beta calculated by taking the covariance between the expected returns of TRV and the S&P
500 and dividing it by the variance of the S&P 500. The Beta = .821580122
5) Estimate the expected returns for your stock as well as the other stocks using CAPM and the
assumed risk-free rate and expected return on the market portfolio given in the instructions:
The expected return equals the risk free rate (.015) plus the beta (.8216) multiplied by the difference
between the market return minus the risk free rate (.07-.015=.055) = 0.060186907

Section 2 Portfolio Optimization Techniques in Excel

Variance-Covariance Matrix for your stock and GE:

TRV
TRV
GE

0.003227084
0.002958985

GE
0.002958985
0.009601178

1) Characteristics of the ORP combining your stock and GE: (Note: the expected return of your
portfolio in your file will be annualized since you are using annualized expected returns for
your stock and GE. But the standard deviation of your portfolio will be monthly since you are
using monthly data. Therefore, you need to annualize your standard deviation before
reporting it below).
2) Wyour stock = 42.5383% WGE: 57.4617%
Annualized:

E(rORP) = 09.1472169% ORP = 24.9815511%

(Sharpe Measure)ORP = 0.306114575

3) Comparison of the weights in the ORP of your stock and GE when calculated using Excels Solver
function versus when using the equation from the textbook:
I used formula 6.10 in the book and E(RT)=.0602, Rf=.015, varianceT=.0032, E(RG)=.1146,
varianceG=.0096, correlation=.5316, stdT= .0568, stdG=.0980
Wyour stock = 4.20% WGE: 95.80%
They are different because the book formula does not have the non-negative constraint and we are
able to short sell some of the stocks.
4) Characteristics of the Minimum Variance Porfolio (MVP):
Wyour stock = 96.1203%

WGE: 3.8797%

Annualized: E(rMVP) = 6.2299237%

MVP = 19.646933%

(Sharpe Measure)MVP = .240746163

5) Confirmation of the weights for MVP using the equation from the textbook:
I used the equation at the bottom of page 154 where Rf=.015, varianceT=.0032, varianceG=.0096,
correlation=.5316, stdT= .0568, stdG=.0980
Wyour stock = 96.12% WGE: 3.88%

Section 3 Expanding Optimization Techniques to Five Risky Assets

TRV
0.003227084
0.002958985
0.000361205
0.000372846

TRV
GE
AMZN
AAPL

GE
0.002958985
0.009601178
0.001203283
0.003084231

AMZN
0.000361205
0.001203283
0.007275623
0.002176701

Maximize
1) Wyour stock = 33.6422% WGE: 41.745% WAAPL: 24.09128% WAMZN: 0%
Annualized:

E(rORP) = 8.3075755%

ORP = 20.8349212%

(Sharpe Measure)ORP = 0.326738721

2) Characteristics of the Minimum Variance Porfolio (MVP):
Wyour stock = 50% WGE: 0% WAAPL: 20.7987% WAMZN: 29.2013%
Annualized: E(rMVP) = 5.5505778%
(Sharpe Measure)MVP = .25740904

MVP = 15.7359578%

AAPL
0.000372846
0.003084231
0.002176701
0.005788484

Section 4 Fama-French 3-Factor Regression Analysis

SUMMARY OUTPUT
Regression Statistics
Multiple R 0.673832
R Square 0.454049
Adjusted R Square
0.424802
Standard Error
0.043444
Observations
60
ANOVA
df
3
56
59

SS
0.087901158
0.105692845
0.193594004

Coefficients
Intercept 0.002839
X Variable 1 0.3345
X Variable 2-0.26562
X Variable 30.834686

Standard Error
0.005970346
0.256925948
0.211539752
0.127204606

Regression
Residual
Total

MS
F
0.029300386 15.52443
0.001887372

t Stat
0.475468397
1.3019306
-1.255644272
6.561761078

P-value
0.636303
0.19827
0.214459
1.83E-08

Significance F
1.81711E-07

Lower 95%
-0.009121329
-0.180184767
-0.689383721
0.579864787

Upper 95%
0.014798751
0.849184273
0.158146367
1.08950768

Lower 95.0%
-0.009121329
-0.180184767
-0.689383721
0.579864787

Upper 95.0%
0.014798751
0.849184273
0.158146367
1.08950768

1) The Fama-French 3-Factor Statistical Pricing Model for our stock:

Given the regression results, we can see that the FF model will not fully explain the pattern of returns
for our stock, but can likely give hints and insights into both the size and growth of the company.
2) Interpretation of the R-Square from my 3-factor Statistical Pricing Model:
The adjusted r-square value from this model is .425 which indicates that the FF model has a slightly
worse ability to explain specific patterns of returns for the TRV stock.
3) Explanation of the coefficient estimate on SMB for my stock:
The sign on the SMB coefficient of this stock is positive which generally means that this stock is not
exceedingly large and is actually a pretty small stock. Negative coefficients are only observed in the
largest of stocks.
The high standard deviation along with the decently low ability of the FF model to predict returns
means that this coefficient is not gigantically significant. Yet, it can still be useful in determining the
size of the stock and can be backed up by the low amount of shares outstanding for TVR.
4) Explanation of the coefficient estimate on HML for my stock:
The negative coefficient of the HML estimate on the stock indicates that it is viewed by investors as a
growth firm. This is consistent with its smaller size because larger firms have positive HML coefficients
which are indicative of less growth.
The coefficient is somewhat significant, but with such low correlation and a decently high standard
deviation, it is highly unlikely that our result will be close to exact. However, it is still important

because it shows more or less the trend of TVRs stock in that investors believe it is a growth
company, which is true.