Q1 Value

Mean 30.26354
Variance 247.0224
Standard Deviation 15.71695
Skewness 1.150387
Kurtosis 3.82424
Coefficient of Variation 0.519336
Minimum 9.156000
Maximum 75.625000
Number of Observation 180

Mean ( μ ): It is the average value of the observation, which is calculated by taking the sum of
observed values (X) divided by the number of observations (N).

Variance (σ2): It is a measure of the difference between observed values from the mean or the spread of
values from the mean. It is referred to as the second moment and is denoted as:

∑ (X −¿ μ)2
N
2
σ =¿
Standard deviation (σ): the most popular estimator of standard deviation is the sample standard
deviation. It is the measure of the dispersion of a set of data from the mean of the data set. Higher
dispersion results in higher standard deviation. The advantage of using standard deviation is that it is
simple to use and widely accepted. The disadvantage of standard deviation is that it does not work for
comparing the variation of items of different units, in addition to this it doesn’t work well when
comparing if two mean levels of a price series are different. Higher price levels will result in higher
standard deviations (double a price series results in double the standard deviation despite variation not
doubling). Standard deviation is calculated as below:

Skewness: Skewness is a measure of asymmetry from the normal distribution; a negatively skewed
distribution in the case of a stock return distribution would have a long thin tail to the left of the
distribution. This would indicate large negative returns or high risk. The advantage of skewness when
analyzing stock data is that it measures large losses, which are of greatest importance to risk managers.
Skewness is referred to as the third moment.

Kurtosis: Kurtosis is a measure that describes the shape of the distribution’s tails, positive kurtosis means
there are fat tails and peak when compared to a normal distribution. If we find positive kurtosis then the
distribution has fatter tails, then the normal distribution.
In the context of stock distributions this means that if the distribution has positive kurtosis it has more
large losses and large gains then the normal distribution. This means that it would have more risk than
expected because it has more large losses then a normal distribution would expect. Kurtosis is referred to
as the fourth moment. The advantages of kurtosis are that if fat tails kurtosis blows up extreme
observations in the tails. This makes it more sensitive to risk and useful to detect if there are very large or
small observations in the sample or outliers. The disadvantage of kurtosis is that there could be fat tails
mainly to the right which would indicate “fat tail” risk however these are large gains, so they aren’t risky
(depends on theory).

Coefficient of variance: Coefficient of variance is calculated by dividing standard deviation by the mean.
The advantage of dividing the standard deviation by the mean level is that it adjusts the standard deviation
to the price level. This is an important advantage of the standard deviation because it can be used for
comparison between stocks at different price levels. It is also a unit-less measure meaning that it doesn’t
matter what units the comparing distributions are in (ex. per lbs. or kg). The disadvantages of co-efficient
of variance are it doesn’t work if the mean is zero or close to zero, this is because the coefficient becomes
sensitive to the mean. This means that coefficient of variance isn’t a good measure when comparing price
changes over short-term time scales. It works best for price level comparisons.

σ
CV =
μ
Minimum: It is the lowest value observed in the data, this can be valuable to measure large losses. It is
best practice to use several minimums to reduce the error of analyzing an outlier.

Maximum: Maximum is the highest observed value in the data set. This isn’t as useful for risk
management as the minimum because large gains don’t pose the same risk threat as large losses do. A
minimum and maximum comparison can be used to create a range of possible expected outcomes.

Jarque - Bera normality test:

JB = 44.797 p-value = 1.873e-10 at 5 % significance level

Ho: normality

H1: non-normality

Interpretation: The degrees of freedom are 2 for kurtosis and skewness. Under Hypothesis of normality
the p value should be more than 5% to fail to reject null hypothesis. So, reject Ho if P-value < 0.05

Here P-value is 1.873e-10 < 0.05.

Here the p value is very low than 0.05. So, we will reject Ho: Normality.
Histogram: Plotting the frequency distribution

Q2. Q2 R
Mean 0.0114918
Variance 0.0019616
Standard Deviation 0.0442896
Skewness -0.1134826
Kurtosis 4.4143630
Coefficient of Variation 3.8540120
Minimum -0.1647354
Maximum 0.1511939

Jarque-Bera normality test:

JB = 15.304 p-value = 0.0004751 at 5 % significance level

Ho: normality

H1: non-normality

Interpretation: The degrees of freedom are 2 for kurtosis and skewness. Under Hypothesis of normality
the p value should be more than 5% to fail to reject null hypothesis. So, reject Ho if P-value < 0.05

Here P-value is 0.0004751 < 0.05.

Here the p value is very low than 0.05. So, we will reject Ho: Normality.
Histogram: Plotting the frequency distribution of exxon.diff

Observations:

 The exxon.diff data represents the log differences or percentage price changes of Exxon stock
prices. The Exxon price data represents the price level of Exxon stock prices.
 The low standard deviation of exxon.diff mean that the data is closer to the mean. Wherein for
Exxon price the standard deviation is high which means the data for Exxon price is spread out
over a large range of values.
 The coefficient of variance statistic in the Exxon price data was useful because low CV indicates
more precise estimate. The CV is high for exxon.diff.
 Both Jarque-Bera tests for Exxon price and exxon.diff rejected the null hypothesis of normality.
 The price percentage change data (exxon.diff) shows a higher level of kurtosis then the price data
(Exxon price).
 The percentage change data also shows negative skewness while the price data shows positive
skewness.

Q3.
a. Regression (linear) Analysis Result (from R program)
 Residuals:
Min 1Q Median 3Q Max
-0.172781 -0.026036 -0.002868 0.026709 0.141160

Coefficients:
Estimate Std. Error t value Pr(>|t|)
(Intercept) 0.012150 0.003421 3.551 0.000491 ***
test$dqsp -0.058350 0.075355 -0.774 0.439768
---
Significance codes: 0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1

Residual standard error: 0.04434 on 177 degrees of freedom

Multiple R-squared: 0.003376, Adjusted R-squared: -0.002255
F-statistic: 0.5996 on 1 and 177 DF, p-value: 0.4398

Observation:

Beta, Exxon Stock Price = f (S&P500)

Beta = -0.058350

 The Beta coefficient interprets the price movements of Exxon compared to the
independent variable S&P500 or how much of the S&P500 price movements explain the
price movements of Exxon stock. Beta measures systematic
 From the regression analysis, we get Beta = -0.058350, then a 100% change in the price
of the S&P500 index would result in a 5.835% negative price movement. However, if we
plot the points of the regression analysis there isn’t a tight correlation of points this
means that the S&P500 doesn’t have much predictive power for the movement of Exxon
stock. This could be because we computed a Beta over many years of data and the Beta
of Exxon may have changed over time giving us mixed results.
 Beta is a measurement of variation of the stock against the index in this case. This can
tell the investor how the stock moves against the average, modern portfolio theory
believes that companies with a Beta less than 1 meaning they move less than the market
are perceived as less risk, however this is not always the case because the stock could be
going downward when the market is rising. It measures variability instead of loss.

b.
Residuals:
Min 1Q Median 3Q Max
-0.170170 -0.024035 0.000715 0.026278 0.136670
 Coefficients:
Estimate Std. Error t value Pr(>|t|)
(Intercept) 0.012084 0.003235 3.735 0.000253 ***
df2$dqoil 0.109103 0.034483 3.164 0.001832 **
---
Significance codes: 0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1

Residual standard error: 0.04321 on 177 degrees of freedom

Multiple R-squared: 0.05353, Adjusted R-squared: 0.04818
F-statistic: 10.01 on 1 and 177 DF, p-value: 0.001832

Observation:
Beta, Exxon stock price = f (Crude Oil Price)
Beta = 0.109103

 The Beta coefficient in this case tells the investor that the percentage price change
of Exxon stock moves positively with the price of crude oil. If crude oil goes up
by 100% it results in Exxon going up by 10.91033%.
 Exxon has a relatively low Beta with the price of crude oil because Exxon is
diversified into many businesses some such as oil refinery operations outperform
when oil prices decrease and other such as oil drilling do better with higher prices.

c. Durbin Watson Test for Autocorrelation in the both cases of a) and b)

Durbin Watson for a. = 2.133

Durbin Watson for b. = 2.1324

There is negligible amount of negative autocorrelation zero autocorrelation being a DW

statistic of 2. We wouldn’t expect to find autocorrelation in this data because we used
first differences to minimize the autocorrelation issues.
d. For regression analysis in 3a, I expected initially to have a coefficient of Beta close to 1
because it is generally accepted that most stock prices follow the market quite closely.
However, after further analysis it is understandable that over a long period of time the
Beta of Exxon has changed and that the companies price changes don’t follow the
S&P500 index closely.
For the regression analysis of 3b, at first, I expected that the Beta between oil prices and
Exxon stock changes would be more significant but because of the diversification of
Exxon’s operations having a low Beta is reasonable.
Q4.
P/E Ratio over years
50
45
40
35
30
25
P/E rato

20
15
10
5
0
30 33 36 39 42 45 48 51 54 57 60 63 66 69 72 75 78 81 84 87 90 93 96 99 02
19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20

Years

P/E

For the investor I think that the P/E ratio is a better measure of risk for the S&P500 index because
movement or variability doesn’t incur loss. The P/E ratio is a measurement of price/ earnings indicating
over or undervalued. As the P/E ratio gets higher I think it is a good indicator of the probability of loss.
Whereas the variability of the market index may does not indicate whether it is over-valued or
undervalued. The index may have periods of low volatility but be drastically overvalued, as we have seen
in the years preceding the financial crisis of 2008.