Assignment Instructions - This assignment has two distinct parts:
Part A: 1000 words:
Using monthly data of a stock market index of your choice (e.g. FTSE 100) over five most recent years (01/01/2014 - 31/12/2018), test the Efficient Market Hypothesis. You are specifically required to perform the following tasks:
a. Choose a financial index and convert its performance into monthly logarithmic returns.
b. Create an equally weighted portfolio of 5 companies from the chosen index and convert the performance of the portfolio into monthly logarithmic returns. The portfolio must comprise of companies with the highest beta value during the preceding 5-year period (01/01/2009-31/12/2013). You may choose any frequency of the data to estimate the beta.
c. Correctly specify the hypothesis for testing weak form market efficiency.
d. Test the data representing logarithmic returns of the index and the portfolio for weak form efficiency by means of independent samples T-test selecting an appropriate level of significance.
e. Discuss your findings in terms of the results of the test, related theories and the characteristics of the chosen index.
Part B: 2,000 words:
Select any one company from the index chosen in part A. Similarly, your analysis needs to cover the most recent 5-year period (01/01/2014 - 31/12/2018).
a. Provide an overview and comment on the key financial figures relating to that company.
b. Download WACC data for the chosen company and analyze that data in terms of the Capital Asset Pricing Model and Gordon's Growth model.
c. Download Debt to Equity ratio (D/E) data for the corresponding period.
d. Calculate correlation coefficient between the D/E and WACC variables.
e. Relate the observed trends and statistics to the traditional and Modigliani and Miller theories on capital structure.
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