Acct 867 - Finance for Accountants

Written Assignment: ACCT867 Finance for Accountants

Trimester Two, 2018

Part A (1)

Company:  

Amazon.com, Inc. is a U.S. e-commerce and cloud computing company founded by Jeff Bezos on July 5, 1994, which is the world's largest internet retailer in terms of revenue and market capitalization and ranked second after Alibaba Group in terms of total sales. Retrived from Amazon official website, Amazon follows four principles: customer obsession instead of focusing on competitors, passion for invention, commitment to operational excellence, and long-term thinking. As being guided by these principles, Amazon becomes the world's second most valuable public trading company ranked after Apple, the largest internet company ranking by revenue, and the America's second-largest employer after Wal-Mart. It also surpassed Wal-Mart and became the most valuable retailer in the United States through capitalization in 2015.  

I chose Amazon because it is a worldwide famous e-commerce company and the historical data of this stock from finance.yahoo.com are sufficient and complete.

Mutual fund:

From the information of fund profile, the goal of T. Rowe Price Latin America Fund (the Fund) is to achieve long-term growth of capital by investing in the common stocks that whose companies located or mainly operated in Latin America. The Fund targets to identify companies that can achieve and maintain long-term above-average earnings growth. It also provides investors with an easy and efficient way to leverage the long-term growth potential of companies primarily in Peru, Venezuela, Chile, Mexico, Brazil and Argentina. Effective productive capacities in Latin America, as well as abundant natural resources and affordable labour, lead to an attractive environment for foreign investments. Investing in T. Rowe Price Latin America Fund involves a high degree of risk, as it is concentrated in emerging economy of particular regions. Share prices are also related to market risk, as well as the risks relevant with political or economic uncertainties abroad and unfavourable foreign exchange rate. The fund is non-diversified, that means it may invest a larger part of its assets in a single company rather than a diversified fund, which may add risk.

The reason I chose this fund is that T. Rowe Price Latin America Fund is one of the top mutual funds listed on finance.yahoo.com. I looked through the daily historical data that there is almost no absence, so the data have an acceptable quality.

Part A (2)

The alpha in the estimated regression for Amazon stock has an estimated value of 0.0194 with a P-value of 0.0390, which indicates that the alpha for the stock is significantly different from zero at 94% confidence interval. As a result, we can conclude that the alpha in the linear regression for Amazon stock is statistically different from zero because of the small p-value. The beta has an estimated value of 1.5714 with a P-value of 5.0972E-06, thus it is significantly different from zero even at 99% confidence interval. There is strong evidence that the beta in the linear regression for the stock is statistically different from zero because of the very small p-value.

The alpha in the estimated regression for the Fund has an estimated value of –0.0063 with a P-value of 0.5194. This high p-value indicates that the alpha for the Fund is significantly different from zero only at 48% confidence interval. As a result, we cannot conclude the alpha in the linear regression for the Fund is statistically different from zero. The beta has an estimated value of 0.8221 with a P-value of 0.0162, so it is significantly different from zero at 98% confidence interval. There is strong evidence that the beta in the linear regression for the Fund is statistically different from zero because of the small p-value.

The beta for each regression is statistically different from zero, which means there exists some relationship between the performance of Amazon stock and the market and some relationship between the performance of the Fund and the market as well.

Part A (3)

R square is a statistical measure of goodness-of-fit for linear models. It represents the percentage of variation that the estimated model explains comparing to the total variation of data. Generally, the higher the R square, the better the estimated model fits the data (Bramante et al., 2015).

R square of Amazon is 0.3035 while that of the Fund is 0.095. The regression estimate of the stock has a higher R square, which is different from what I expected. Normally stock prices have more uncertainty and greater fluctuation comparing to mutual funds, linear regression is not easy to estimate the total variance well due to outlier points and a high degree of dispersion; however, mutual funds have a relatively less fluctuation and are expected to have a better estimation by linear regressions. As a result, I thought that the estimated regression for the stock would have a lower R square.

But in our case, the estimated regression for the Fund has a lower R square. One of the possible reasons is that Amazon has been on the market since 1997 and until now has 981.681 billion market capitalization, which guarantees a low price-volatility.  Thus, the estimated linear regression for the stock is better than that for the Fund with only 585.09 million net assets.

Part A (4) [pic 1]

[pic 2]

We can see from the above graphs that, there are more outlier points in the plot for the Fund, for example, the point near -25% on the vertical line. The scatterplot for Amazon stock looks not ideal as well but slightly better, which can be used to explain why it has a lower R square.

The slope of the second plot is flatter than the first one, due to its lower beta, the intercept of the linear plot. Beta in the market model represents the volatility of a security or a portfolio in comparison to the market as a whole. Thus, a beta equals to 1 means the security moves together with the market, and a beta less than 1 means that the security is theoretically less volatile than the market while a beta greater than 1 indicates that the security's price is theoretically more volatile than the market. The beta of Amazon is 1.5714, so we can say the stock of Amazon has a greater volatility than the market. The beta of the Fund is 0.8221, indicating a lower volatility compared with the market. A fund’s volatility is generally less than that of a stock trading on the market.