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Financial Modelling Report - Essay Example

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In addition, different regions of the world have exhibited different patterns in regards to stock return depending on the prevailing market conditions…
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Financial Modelling Report
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Download file to see previous pages Owing to the strong impact that 2008 financial crisis caused in the financial markets especially by exacerbating market volatility; this project will also compare the variable relationships before the crisis and after the crisis with the aim of finding out whether the crisis had caused any significant changes in the stock market dynamics.
The analysis will primarily involve generation of line graphs, scatter plots, relationship tables, and use of regression analysis to compare the relationship between various variables. Analysis of regression statistics and scatter plots will be generated by SPSS while charts will be generated by Microsoft excel worksheets. The output generated from SPSS will be synthesized and presented in tables in a manner that is easy to read and understand. The dependent variable will be the return and the independent variables will include size of firm, book-to-market ratio, beta and three geographical regions including America, Asia and Europe. The three variables will be presented as dummy variables to enable multi-regression analysis. Consequently, number 1 will be assigned to the region that the sample has been obtained; and 0 will be assigned to the other regions that the sample has not been obtained.
Beta is used in CAPM to measure systematic risk or volatility of a particular security relative to the market as a whole (Zhang, Shu and Brenner, 2010). Therefore, the securities with higher beta have more risk than the market and many investors would not want to invest in them. However, it is widely accepted that the securities that have high return will also have a high risk. As such, from the figure 1 and 2 below, the beta is directly proportional to the stock return, meaning that as the beta increases, the return on stocks will also increase and vice versa. The essence of a higher return in the stocks with a higher beta is to compensate the investors for the higher risk they are ...Download file to see next pagesRead More
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