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1.    Calculate returns for these three series in Excel or any software of your choice using the transformation: rt = 100*ln(Pt / Pt-1) and perform the Jarque-Berra test of normally distributed returns for each of Boeing and GD. What do you infer about the distribution of the two stock returns series? Describe also the risk and average return relationship in each of the two stocks.        Hints:We have performed a similar task in Workshop 01. If ...

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Solutions

1. Calculations Returns and Jarque- Berra Test

The returns for each of the stocks have been calculated using the given formula. These returns signify the performance of the stocks (Jordan, et al., 2010). Similarly the Jarque- Berra test of normality has been done. 

It has been observed that there is a relationship between risk and return for GD stock and the BA stock. The BA has a comparatively lower return and higher risk. On the other hand, GD stocks have a higher average return and a comparatively lower risk level. Hence we could conclude that lower rates of return attract higher levels of risks.

We can check the profitability of these two stocks by comparing their average returns and the level of risk. We can then tell the most preferred stock that an investor should invest in. according to this output, GD stocks looks more preferable than Boeing stocks. This is because it offers a high return with low level of risk (Lind, 2008). Similarly, GD stocks are also suitable for risk adverse individuals.

The probability value of this test is 0.022 for the BA stocks. This probability is less than 0.05. Reject the null hypothesis. Conclude that BA stocks are distributed normally. On the other hand, the probability value for the GD stocks is more than0.05. Fail to reject H0 (Stuart A., 1999). Conclude that the returns on GD stocks are not distributed normally.This question aims at testing the hypothesis that the mean return of GD.

 

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