QBA25622 ASSIGNMENT PROJECT
Finance Discipline Group, UTS Business School.

Summer 2017

Subject Coordinator: Dr Hardy Hulley

This assignment has several parts. Some parts are
technical
and designed to help you understand and apply the material in the chapters covered in the first part of the semester. The econometrics part is designed to help you develop practical econometric skills (e.g., understanding of regression analysis and interpretation of regression results). You will apply regression analysis as done by finance professionals using real world data with applications to financial market and survey data.

· You
must type your answers
in the spaces provided. Make use of MS Office Equation environment (i.e., in Ribbon:
Insert
à
Equation, see examples within this document).

· You
must
include this cover sheet. This assignment can be done in groups of up to

six

(6) students. Your group members
do not
need to be part of the same tutorial group, but you
must nominate a tutor
that would represent the majority of your group members.

· No names may be added to the group lists after the submission apart from the names that appear below at the time you hand-in your assignment.

·
Submit only one assignment for each group. DO NOT hand in a separate assignment for each group member.

· Late assignments will incur a penalty of 5% for each day past the due date up to 5 days. Assignments submitted 5 days after the due date will receive zero mark.

The assignment submission boxes are located on Level 5, Building 8 (Chau Chak Wing Building) in the Business Faculty.
The assignment boxes are used by many subjects
so it is important to identify your assignment CLEARLY with your names and SIDs. Submit your assignment to FINANCE 1 box. Assignments submitted to boxes other than FINANCE 1 will not be picked up, and as a result, will not be graded. It is your responsibility to ensure that you submit your assignment to the correct assignment box. Do not remove this assignment cover.
The onus is in you to submit your assignment to the correct subject box by the due date. The deadline to submit your assignment is
5:00pm Friday 2 February.

Tutor’s Name: _____________________________________

Tutorial Day and Time: _____________________________________

Group Work Protocol

The following group work protocol is required to satisfy the by-laws on assessment tasks of the UTS Business School.

Group work and group assignments are an important part of business education. The purpose of group work goes beyond the requirements of the group project itself. Group work is also intended to develop awareness of the dynamics of teamwork and your role in a team environment. In undertaking group work it is expected that each team member will communicate with other team members in a professional and courteous manner. Resolving any conflict or difficulties that arise within the team is also part of the group dynamics that may emerge during the project. It is expected that each team member will take responsibility for managing and reducing any conflict that may arise. If the team members are unable to resolve tensions or conflicts then this MUST be discussed face-to-face with the lecturer/tutor during the consultation hours as soon as it becomes obvious that a resolution within the team cannot be agreed.

In the learning environment of group work we are seeking to ensure that you develop and demonstrate both academic skills and important group work skills such as:

· Commitment to working with others (e.g., undertaking a fair share of the work, sharing ideas, doing the tasks allocated, attending meetings).

· Collaboration and inclusiveness (e.g., encouraging and supporting others, respecting others; recognising the skills and valuing the contribution of others, helping resolve conflicts).

· Contribution to establishing and working towards a common outcome (e.g., establishing and supporting team goals, plans, rules, roles, decisions).

· Please bear in mind that any member of a group reserves the right to leave the group to form/join another group or submit the assignment individually.

Group Work Declaration Form

EACH member of a group must sign a declaration form, otherwise the project report will not be marked. Complete only Part 1 or Part 2. Do not complete both. This sheet should be completed and handed in along with your group assignment.

Part 1

I believe that all members of the group have contributed fairly to this assignment, and each member should receive the same mark for the assignment.

Your name:.............................................................................Signature.........................................................

Group member names:

Part 2

I believe that not all members of the group have contributed fairly to this assignment. I believe the proportion of the total workload that each has contributed is indicated below.

Your name..........................................................................Signature...........................................................

Group member names: Proportion of Workload:

……………………… ……….….%

………………………. …………..%

……………………… ……….….%

………………………. …………..%

………………………. …………..%

………………………. …………..%

Total = 100%

Please note that if you have signed Part 2 you must attach a statement explaining:

·
Why you believe a group member/group members have not contributed their fair share to the project

·
A breakdown of tasks you and others have completed in the project

·
An estimate of the time you think each of those tasks has taken.

· Any other positive or negative contributions made by you and others

This information will be shown to other group members so that they have an opportunity to respond.

While each group member’s comments will be taken into consideration, the final decision on how the marks are awarded will remain the right of the subject coordinator.

Question A (10 marks) – Australian Housing Market and Mortgage Loan Repayments

Introduction

Housing affordability is an enormous issue around the country. The average house price in Australia is now $656,800. In NSW, that average price jumps to $865,000, by far the highest price in the country; Victoria is next at $690,000, then the ACT at $642,000 and Western Australia at $536,000. If you're after a cheaper option, head south, because Tasmania's average price is $343,900. The Australian Bureau of Statistics releases its regular property price index and in this question we will try to analyse some of the issues on the Australia housing market.

A1. (2 marks) File Assignment Data.xlsx, tab: Australian House Price Index, contains quarterly data on Australian House Price Index (HPI) for the eight capital cities as well as the weighted average HPI for the eight capital cities. Calculate compound annual growth rates (CAGR) and fill in the table below.

A2. (1 mark) Based on your answers in A1, over the period from 2007 to 2016, which city experienced the lowest growth in value of established houses? Which city experienced the highest growth in value of established houses over the last 4 years?

A3. (1 marks) You have set your eyes on a house in (PICK A CITY FROM A1 ABOVE) that is going for $675,000 today [just above the national average]. You are very excited about the prospects of buying this house and negotiate a 25-year mortgage with 20% down and 6% interest rate. What will be the amount of your monthly payments?

A4. (2 marks) For each month for the duration of your mortgage calculate how much of your monthly payment goes to principal re-payment and how much of it is interest. Plot a graph showing a breakdown of your periodic payment into principal repayment and interest. What percentage of your monthly payment on the 24^th
month of the mortgage contract goes towards repayment of the principal?

Figure 1. This is a conceptual depiction of what is expected in question A4. The figure does not necessarily represent the correct values based on assumptions in A4.

A5. (2 marks) What is the amount of total interest you will end up paying?

A6. (2 marks) You believe that the housing market will continue to grow at the same rate as in the past 4 years. How much will your house in (YOUR CITY SELECTION) be worth after 25 years? Will the house value appreciation (if any) be sufficient to cover the total interest you paid?

Question B (10 marks) - Stock Markets

Introduction

The Capital asset pricing model (CAPM) takes into account the stock's sensitivity to non-diversifiable risk (also known as systematic risk or market risk), often represented by in the financial industry, as well as the expected return of the market and the expected return of a theoretical risk-free asset. CAPM shows that the cost of equity capital is determined only by beta. Despite it being invented in the 1960s, the CAPM still remains popular due to its simplicity and applicability in a variety of situations. It may be a good idea to check out
Understanding Beta
at
http://www.investopedia.com/video/play/understanding-beta/
.

The CAPM is a model for pricing an individual security or portfolio. The risk of a portfolio comprises systematic risk, also known as undiversifiable risk, and unsystematic risk which is also known as idiosyncratic risk or diversifiable risk. Systematic risk refers to the risk common to all securities—i.e. market risk. Unsystematic risk is the risk associated with individual assets. Unsystematic risk can be diversified away to smaller levels by including a greater number of assets in the portfolio (specific risks "average out"). The same is not possible for systematic risk within one market. Depending on the market, a portfolio of approximately 20 securities would be sufficiently diversified.

The beta from a
single factor model
in the form

is a good approximation to the CAPM beta.

The basic idea is that stocks tend to move together, driven by the same economic forces (the market). Here, the dependent variable, are percentage returns for stock , and independent variable, are percentage returns for a broad market index.

is the intercept and is the slope of the linear relationship between the stock returns and the market. are the residual returns that cannot be explained by the market fluctuation (this is your idiosyncratic or firm-specific fluctuations).

In the file Assignment Data.xlsx, tab:ASX200 stocks (Prices), you will find prices for 152 stocks as well as the S&P/ASX 200 Index (a benchmark for the Australian stock market) from July 1, 2014 to June 30, 2017.

1. Pick any 3 securities (full name, industry and sector information are provided in column headings).

2. Convert your chosen security prices and the market index into percentage returns. For each asset/index, percentage returns are defined as . This will define your returns for the three stocks, , and the market return .

B1. (3 marks) Perform OLS regression for each stock separately and report regression outputs for the three models from Excel/Matlab including line fit plots and residual plots.

B2. (3 mark) For each stock, discuss the OLS assumptions and violations (if any) based on the results from B1.

B3. (1 mark) Discuss the estimated betas for your three stocks and their statistical significance. Are these betas in line with your expectations? Provide your reasoning. What does it mean if a stock has a beta equal to 1? What does it mean if a stock has a beta equal to zero?

B4. (1 mark) Discuss the measure of fit () of your regressions in B1. Are these in line with your expectations? Provide your reasoning. Note that gives the fraction of the variance of the dependent variable (the return on a stock/portfolio of stocks) that is explained by movements in the independent variable (the return on the market index).

B5. (2 marks) Construct an equally weighted portfolio consisting of your three chosen stocks (equally weighted portfolio returns are simply the average of individual stock returns in that portfolio, ) and find the portfolio beta. Report regression output (including line fit plots and residual plots), assess the OLS assumptions and violations (if any) and discuss the estimated portfolio beta and the measure of fit of your regression. How does the measure of fit for the portfolio compares with the measures of fit for your individual stocks? Comment on portfolio diversification effect using your s.

Question C (10 marks) - Population Survey

Introduction

Each month the Bureau of Labor Statistics in the U.S. Department of Labor conducts the “Current Population Survey” (CPS), which provides data on labor force characteristics of the population, including the level of employment, unemployment, and earnings. Approximately 65,000 randomly selected U.S. households are surveyed each month. The sample is chosen by randomly selecting addresses from a database comprised of addresses from the most recent decennial census augmented with data on new housing units constructed after the last census. The exact random sampling scheme is rather complicated (first small geographical areas are randomly selected, then housing units within these areas randomly selected).

The file Assignment Data.xlsx, tab: Population Survey contains the data from the survey. These data are for full-time workers, defined as workers employed more than 35 hours per week for at least 48 weeks in the previous year. Data are provided for workers whose highest educational achievement is (1) a high school diploma, and (2) a bachelor’s degree.

Series in Data Set:

FEMALE: 1 if female; 0 if male

YEAR: Year

AHE: Average Hourly Earnings

BACHELOR: 1 if worker has a bachelor’s degree; 0 if worker has a high school degree

Use the data in Assignment Data.xlsx, tab: Population Survey to answer the following questions:

C1. (2 mark) Run a regression of average hourly earnings (AHE) on age (Age). Report Excel/Matlab output. What is the estimated intercept? What is the estimated slope?

C2. (2 mark) Run a regression of
AHE
on
Age, gender (Female), and education (Bachelor). Report Excel/Matlab output. What is the estimated effect of
Age
on earnings? Construct a 95% confidence interval for the coefficient on
Age
in the regression.

C3. (1 mark) Are the results from the regression in C2 substantively different from the results in C1 regarding the effects of
Age
and
AHE? What bias does the regression in C1 appear to suffer from?

C4. (2 mark) Bob is a 26-year-old male worker with a high school diploma. Predict Bob's earnings using the estimated regression in C2. Alexis is a 30-year-old female worker with a college degree. Predict Alexis's earnings using the regression.

C5. (1 mark) Compare the fit of the regression in C1 and C2 using the regression standard errors, and . Why are the and so similar in regression C2?

C6. (1 mark) Are gender and education determinants of earnings? Test the null hypothesis that
Female
can be deleted from the regression. Test the null hypothesis that
Bachelor
can be deleted from the regression. Test the null hypothesis that both
Female
and
Bachelor
can be deleted from the regression.

C7. (1 mark) A regression will suffer from omitted variable bias when two conditions hold. What are these two conditions? Do these conditions seem to hold here?