Written by: Arravind S/O Udayakumar (S9171688G)

Written for: Professor Jin Sainan

ECON 107 Introduction to Econometrics G2

Empirical Project

1. Project objective
This project used the monthly adjusted closing prices for stocks from the S&P 500 to
estimate the beta of 15 stocks and two portfolios which comprises of 5 and 15 stocks
respectively. The data range if 5 years. The data was retrieved from Yahoo finance.
The equation used in this project is Rt = logPt logPt-1. This was used to find the year on
year compounded rate of return. All other factors were assumed to be constant. In order
to further ensure completion of the project all stocks in the portfolio were given equal
weighting. While in reality you may not invest the same amount in all stocks. The
summary of the data is listed below in Table 1. Various econometric principles were used
in the analysis of these results.
Table 1: Regression Analysis and Report

Portfolio of 5 stocks are as follows: 1. Blizzard 2. P&G 3. NVIDIA 4. Apple 5. Coca Cola.

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Written by: Arravind S/O Udayakumar (S9171688G)
Written for: Professor Jin Sainan

2. Interpretation of data

The beta of the stock price will give its relationship with the market index. Since the Beta of
apple is 1.301, it means that if the market index increases by 1%, then apples stock price will be
increase by 1.301057%

3. Observations and Insights to data

Portfolio of 15 has the lowest risk- We believe that this is due to the diversifying of the
stocks across various correlations between the stocks.
Portfolio of 5 includes 2 Fast Moving Consumer Goods (FMCG) companies and 3 Tech
companies, and since these two groups of stocks are from the same sector, they will tend
to be more correlated hence risk is higher due to low diversification.
FMCG companies (also known as defensive stocks) usually have lower beta as they
activities usually involve immediate cash therefore are less risky. Their stock
performance may not be as responsive to the performance of the market for example,
they will not rise as fast when the market is on an uptrend and will not fall as fast on a
downtrend.
Financial Companies such as Goldman Sachs and Citi has the highest beta, 1.622551 &
1.82644 respectively as they usually take on more risk due to the nature of their business
R squared value is higher for portfolio of 15 stocks than 5 stocks, hence it would be a
better fit and hence give a more accurate information about the market index

4. Conclusion
Econometric analysis indicates that one of the main observations from this is that
diversification of around 15 stocks is better than just 5 stocks in order to replicate the
performance of the Market index due to the R squared value being a better fit to the market Index.
Also different sectors have different betas and therefore carry a differing amount of risk. Its best
to manage the beta value of the portfolio by investing in some defensive stocks such as FMCG
companies. However, we cannot invest in too many defensive stocks as well as the returns
achieved from these stocks are generally lower than the returns of stocks with high beta.