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Analyzing the Profitability and Volatility of Stock Returns in Comparison to Market Returns: A Statistical Approach

This assignment focuses on analyzing stock profitability and volatility, using statistical methods to compare stock returns to market returns.

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    Analyzing the Profitability and Volatility of Stock Returns in Comparison to Market Returns: A Statistical Approach, page 1Analyzing the Profitability and Volatility of Stock Returns in Comparison toMarket Returns: A Statistical ApproachQuestion 1a.Test the null hypothesis that the population mean of your stock return is equal to thatof the market return, against an appropriate alternative hypothesis.b.State the assumptions under which the test is valid.c.Based on the outcome of the test, explain whether your stock is more or less profitablethan the market portfolio; or whether they are equally profitable.Answer 1a.Null Hypothesis, Ho: there is no significant difference between mean of stock return andmarket return.That is u1–u2 = 0Alternative Hypothesis, H1: there is significant difference between mean of stock returnand market return.That is u1–u2 ≠ 0Level of significance is 0.05 which is alphaTest Statistic:()()()()122122211222121111,2mean xmean xtSnnnsnswhere Snn−=+−+−=+−

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    Analyzing the Profitability and Volatility of Stock Returns in Comparison to Market Returns: A Statistical Approach, page 2

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    Analyzing the Profitability and Volatility of Stock Returns in Comparison to Market Returns: A Statistical Approach, page 3t-Test: Two-Sample Assuming EqualVariancesmarketreturnstock returnMean0.2387401670.521180933Variance12.7761435236.45618903Observations6060Pooled Variance24.61616628Hypothesized Mean Difference0Df118t Stat-0.311801213P(T<=t) one-tail0.377870925t Critical one-tail1.657869522P(T<=t) two-tail0.755741849t Critical two-tail1.980272249Decision Rule: Since[p-value=0.755741849] >alpha (0.05),I fail to reject Ho at 5% level of significanceand conclude thatthere isnosignificant differencebetween mean ofstock returnandmarket return.b.For applying t test with equal variances, there are certain set of assumptions to befollowed whichare as follows.1.The populations arenormally distributed.2.Thetwo groupsareindependentof each other.3.The two populations have thesame variance.c.Clearly from part a) stock and market return are equally profitable.

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    Analyzing the Profitability and Volatility of Stock Returns in Comparison to Market Returns: A Statistical Approach, page 4

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