ACF 504: FINANCIAL MARKETS
Coursework Assignment II
GROUP 20

Definition of the Dataset

(Word Count 1938)

The dataset used in this report is derived from Thomson ONE Banker. The spreadsheet in Appendix contains the daily price of the TESCO and the FTSE All Share index during the period from 1 December 2014 to 30 November 2015. Each closing price includes 254 observations. We obtain 253 daily returns of the TESCO and 253 daily returns of FTSE index after calculating daily simple returns by using the following formula. =

− −1 −1

The Capital Asset Pricing Model (CAPM)
Before calculating the annualized standard deviation of daily stock returns and index returns, assuming that the expected return on the index is equal to the average of simple index returns, the expected return on the index equals to -0.002%. Since the number of sample of daily index returns is 253, we calculate the annualized expected return on the index as below.
((1 − 0.002%)253 − 1) = −0.606%

The following formula is used to calculate the sample standard deviation:
253

1
S=√
∑( − ̅ )2
253 − 1
=1

By using Excel function of STDEV.S, the sample standard deviation of daily index returns and of daily stock returns are 1.01% and 2.05% respectively. After multiplying by√253, the annualized sample standard deviation of daily index returns (S ) and of daily stock returns ( ) are 16.06% and 32.59%, respectively. The correlation of daily returns between the FTSE index and the TESCO share is equal to 0.64448, which can be calculated by using Excel function of CORREL. Also, we can get the covariance between the FTSE index’s daily return and the TESCO share’s daily return by using the correlation formula ( Corr( , ) = ρsm =

Cov( , )

). Thus, the

covariance is 0.03372.

In order to calculate the expected return on the stock, we use