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Introduction

The index model in investment analysis states that the return of a stock is linearly related to the return of
the market portfolio. To justify this statement, we have selected 7 international company and S&P 500
index as market portfolio. Our objective is to take S&P 500 return as explanatory variable and individual
selected companies return as explained variable and tries to find out their linear relationship using
regression analysis. Later we will interpret the findings from those regression analyses.

Selected stocks
Amazon.com, Inc. (AMZN), Arotech Corporation (ARTX), AstroNova, Inc. (ALOT), BCB Bancorp Inc.
(BCBP), Microsoft Corporation (MSFT), Netflix, Inc. (NFLX), Yahoo! Inc. (YHOO)

Data
Monthly stock price as well as S&P 500 index price of last 5 years has been collected from
http://finance.yahoo.com/ , Return has been calculated by Rt= lnPt-lnpt-1. 3 stock portfolio and 7 stock
portfolio return is the mean return of the included stocks. Summary of the data table is given below:
Date
01-12-10
03-01-11
01-02-11
01-03-11
01-04-11
02-05-11
01-06-11
01-07-11
01-08-11
01-09-11
03-10-11
01-11-11
01-12-11
03-01-12
01-02-12
01-03-12
02-04-12
01-05-12
01-06-12
02-07-12
01-08-12
04-09-12
01-10-12
01-11-12
03-12-12
02-01-13
01-02-13
01-03-13
01-04-13
01-05-13
03-06-13
01-07-13
01-08-13
03-09-13
01-10-13
01-11-13
02-12-13
02-01-14
03-02-14
03-03-14
01-04-14
01-05-14
02-06-14
01-07-14
01-08-14

AMZN
-5.93%
2.13%
3.87%
8.35%
0.45%
3.89%
8.45%
-3.33%
0.46%
-1.27%
-10.47%
-10.51%
11.63%
-7.89%
11.96%
13.55%
-8.54%
7.00%
2.14%
6.22%
2.41%
-8.80%
7.91%
-0.47%
5.67%
-0.46%
0.84%
-4.88%
5.89%
3.11%
8.13%
-6.96%
10.68%
15.22%
7.81%
1.30%
-10.60%
0.95%
-7.37%
-10.08%
2.73%
3.84%
-3.70%
7.99%
-5.02%

Monthly Return
ARTX
A LOT
BCBP
MSFT
NFLX
YHOO
Port(3) Port(7) S&P 500
-3.04%
0.05% 10.06%
-0.66% 19.76%
-3.11%
-2.33% -1.85%
2.24%
-12.48%
-4.43%
3.47%
-3.65%
-3.52%
1.72%
1.10%
0.71%
3.15%
-2.12%
4.72%
-7.39%
-4.58% 14.02%
1.69%
5.39%
3.87%
-0.10%
-15.42%
-0.13%
6.12%
2.07%
-2.17%
5.94%
6.55%
6.03%
2.81%
53.55%
3.90%
1.46%
-2.92% 15.18%
-6.72%
2.76%
2.00%
-1.36%
6.15%
2.00%
3.40%
3.88%
-3.04%
-9.57%
2.76%
2.23%
-1.84%
-17.50%
-3.61%
-3.58%
5.24%
1.25% -13.81%
7.07%
5.50%
-2.17%
-5.04%
-5.20% -10.16%
-2.33% -12.38%
3.82%
-4.62% -4.23%
-5.85%
-14.84%
-5.93%
-7.52%
-6.64% -72.99%
-3.29%
-6.79% -6.68%
-7.45%
2.63% 13.10%
7.01%
6.76% -32.21% 17.19%
-2.68% -0.62% 10.23%
-22.48%
0.13%
3.76%
-3.27% -24.06%
0.45% -10.77% -9.10%
-0.51%
-2.47%
-3.94%
0.90%
1.47%
7.12%
2.64%
-9.44% -7.28%
0.85%
-1.68%
5.62%
1.77% 12.88% 55.09%
-4.18% 14.22% 12.47%
4.27%
5.76%
0.50%
2.91%
7.87%
-8.21%
-4.23%
-7.63% -5.43%
3.98%
-0.80%
4.62%
-4.40%
1.63%
3.82%
2.60% 11.09%
9.07%
3.09%
-4.12%
0.59%
3.44%
-0.75% -36.15%
2.08% 10.25%
8.49%
-0.75%
-21.48%
-3.00%
-0.02%
-8.60% -23.37%
-1.95%
-9.00% -8.38%
-6.47%
4.08%
-2.09%
1.36%
4.68%
7.66%
3.80%
6.75%
6.23%
3.88%
-12.78%
2.60%
1.91%
-3.73% -18.63%
0.06%
1.41%
0.85%
1.25%
-9.53%
-0.25%
-1.92%
5.14%
4.93%
-7.81%
5.99%
4.97%
1.96%
17.19%
7.27%
2.60%
-3.50%
-9.26%
8.69%
2.19%
2.07%
2.39%
4.12%
-3.16%
-4.37%
-4.19% 37.54%
5.24%
-6.95% -5.98%
-2.00%
10.54%
6.66%
-9.59%
-6.15%
3.07% 10.85%
7.66%
6.31%
0.28%
-6.58% 12.91%
4.44%
0.34% 12.50%
5.85%
0.55%
0.92%
0.70%
6.58%
-0.90%
0.74%
2.73% 57.92%
-1.37%
8.72%
7.50%
4.92%
0.00%
-1.31%
2.80%
2.09% 12.95%
8.21%
0.64%
1.23%
1.10%
5.31%
-2.30%
0.52%
2.87%
0.64%
9.91%
0.72%
1.46%
3.54%
-9.96%
2.88%
6.95% 14.58% 13.24%
4.97%
-2.88% -0.78%
1.79%
40.86%
3.78%
-0.79%
5.99%
4.60%
6.16%
5.69%
5.71%
2.06%
-5.20%
7.81%
3.08%
-1.04%
-6.94%
-4.55%
2.26%
1.51%
-1.51%
-7.62%
3.31%
-0.09%
-8.14% 14.68% 11.14%
8.62%
7.25%
4.83%
29.66%
2.95%
1.79%
5.49% 14.95%
-3.51%
-4.21% -3.17%
-3.18%
-6.63%
-6.03%
2.33%
-0.36%
8.54% 20.14%
9.91%
9.64%
2.93%
-5.88% 14.42%
1.83%
6.20%
4.20%
-0.70% 13.93% 12.06%
4.36%
33.21%
8.98% 17.19%
8.16% 12.60% 11.57%
8.38%
8.85%
2.77%
41.70%
-2.13%
3.56%
-1.91%
0.65%
8.94%
1.13%
1.75%
2.33%
-26.78%
1.25%
-5.19%
1.14% 10.60% -11.60%
-7.62% -7.38%
-3.62%
24.46%
-0.37%
4.85%
1.98%
8.50%
7.13%
1.97%
2.53%
4.22%
60.11% -13.02%
-1.52%
6.76% -23.58%
-7.43%
-9.73% -7.52%
0.69%
-58.36%
5.56%
1.67%
-1.45%
-8.90%
0.14%
-9.45% -8.27%
0.62%
22.14% 12.96%
1.82%
2.03% 26.04%
-3.68%
6.36%
5.25%
2.08%
2.96%
-4.65%
0.89%
1.84%
5.31%
1.38%
3.78%
3.37%
1.89%
-29.82%
-1.11%
-3.54%
3.44%
-4.14%
1.92%
-3.68% -2.89%
-1.52%
7.84%
-1.20%
0.70%
5.75% 12.21%
7.27%
8.37%
7.88%
3.70%
-9.67%
-0.17%
2.28%
2.03%
-5.70%
5.65%
-4.98% -3.41%
-1.56%

Important statistics of Regression Analysis


Stock Name

Amazon.com,
Inc. (AMZN)

Estimated
values of
0+1Rmt
0.01+0.91Rmt
R2=0.16

Arotech
Corporation
(ARTX)

-.01+1.39Rmt

AstroNova,
Inc. (ALOT)

0.01+0.40Rmt

R2=0.05

R2=0.06
BCB
Bancorp Inc.
(BCBP)

0.00+0.63Rmt

Microsoft
Corporation
(MSFT)

0.01+0.93Rmt

Netflix, Inc.
(NFLX)

0.01+1.69Rmt

R2=0.17

R2=0.26

R2=0.08
Yahoo! Inc.
(YHOO)

Analysis of Variance(ANOVA)

Intercept
X Variable 1

Coefficients
0.01
0.91

Intercept
X Variable 1

Coefficients
-0.01
1.39

Intercept
X Variable 1

Coefficients
0.01
0.40

Intercept
X Variable 1

Coefficients
0.00
0.63

Intercept
X Variable 1

Coefficients
0.01
0.93

Intercept
X Variable 1

Coefficients
0.01
1.69

Intercept
X Variable 1

Coefficients
0.00
1.36

Intercept
X Variable 1

Coefficients
0.01
0.96

Standard
Error
0.01
0.28
Standard
Error
0.03
0.80
Standard
Error
0.01
0.21
Standard
Error
0.01
0.18
Standard
Error
0.01
0.21
Standard
Error
0.03
0.75
Standard
Error
0.01
0.26
Standard
Error
0.01
0.26

Intercept
X Variable 1

Coefficients
0.01
0.98

Standard
Error
0.01
0.22

0.00+1.36Rmt
R2=0.33

3 Portfolio
AMZN,
A LOT &
NFLX

0.01+0.96Rmt

7 Portfolio

0.01+0.98Rmt

R2=0.19

R2=0.26
Intercept coefficient= 0
X Variable 1coefficient=1

t Stat
1.55
3.27

P-value
0.13
0.00

t Stat
-0.29
1.75

P-value
0.77
0.09

t Stat
1.28
1.86

P-value
0.21
0.07

t Stat
-0.04
3.50

P-value
0.97
0.00

t Stat
0.88
4.54

P-value
0.38
0.00

t Stat
0.45
2.23

P-value
0.65
0.03

t Stat
0.06
5.32

P-value
0.95
0.00

t Stat
1.61
3.63

P-value
0.11
0.00

t Stat
1.72
4.53

P-value
0.09
0.00

Interpretation of the results


Amazon.com, Inc. (AMZN)
Determination coefficient (R) is a relative measure of the regression representative quality which shows
the percentage of the explained share of the sum of squares of total dependent variable deviations from the
average. The closer the determination coefficients values to 1, (that is to 100%) the more representative is
the model. As we can see in this model, the determination coefficient amounts to 0.16, which means that
the model explains only 16% of the occurrence of variation. The R2 value of about 0.16 means that the S&P
500 index return explains about 16 percent of the variation in the AMZN stock return. This is a very low
value, since an R2 can at most be 1.
The slope coefficient of about 0.91 suggests that if the S&P 500 index return goes up by a unit, the AMZN
stock return will go up, on average, by 0.91 units. This coefficient is significant, for the t value of about
3.27 (obtained under the assumption that the true population coefficient is zero). It is also significant for
the p value which is almost zero. If we fix the critical p value, say, at the 5 percent level, Then the intercept
coefficient, 0.01, is not statistically significant, here p value (i.e., probability value) of the t statistic of 1.55
is about 0.13. Thus, if we were to reject the null hypothesis that the true intercept is zero at this p value, we
would be wrong in 13 out of one hundred occasions.
Arotech Corporation (ARTX)
The R2 value of about 0.05 means that the S&P 500 index return explains about 5 percent of the variation
in the ARTX stock return. The slope coefficient of about 1.39 suggests that if the S&P 500 index return
goes up by a unit, the AMZN stock return will go up, on average, by 1.39 units. This coefficient is not
statistically significant, for the t value of about 1.75 because the p value of this t value is 0.09 which is
greater than critical p value 0.05. Here the standard error is also higher which is a measure of variability of
B coefficient from sample to sample. The intercept coefficient, -0.01, is not statistically significant.
AstroNova, Inc. (ALOT)
The R2 value of about 0.06 means that the S&P 500 index return explains about 6 percent of the variation
in the ARTX stock return. The slope coefficient of about 0.40 suggests that if the S&P 500 index return
goes up by a unit, the AMZN stock return will go up, on average, by 0.40 units. This coefficient is not
significant, for the t value of about 1. Because the p value of this t value is 0.07 which is greater than critical
p value 0.05. The intercept coefficient, 0.01, is not statistically significant, for the p value of obtaining a t
value for this coefficient of as much as about 1.28 is practically 21 percent.
Others
By following the same process, we are eligible to interpret the regression result of BCB Bancorp Inc.
(BCBP), Microsoft Corporation (MSFT), Netflix, Inc. (NFLX), Yahoo! Inc. (YHOO), AMZN, ALOT &
NFLX(3 stock portfolio) & 7 stock portfolio.
An important information is noticeable, that is when 3stock portfolio or 7 stock portfolio is formulated the
R2 values become higher which means higher explanation of portfolio return variation by S&P 500 index
return and B coefficient takes a value closer to 1. In case of 3 stock portfolio B=0.96 & for 7 stock portfolio
B=0.98.

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