FINM7008 Applied Investments

Semester 1, 2024

Assignment

Key information

ˆ Due date: Friday 10 May 2024, by 5pm (Week 10).

ˆ To be conducted in groups of 3-4 students.

ˆ Submit electronically through Wattle. Please read the instructions on page 7 carefully.

ˆ 20% of final grade and is not redeemable.

ˆ 20 marks in total. The grading will be benchmarked to the overall performance of the

cohort, targeting an average grade of 15−16.

ˆ Word limit: there is no definite word limit, but 2500−4000 words is recommended.

1. Assignment

Event study is a very powerful tool in finance to assess the impact of a specific event, such as
an announcement or occurrence, on the value of a company or financial assets. Event studies
are widely used by researchers, investors, and policymakers to understand how specific events
influence financial markets. In the first part of this assignment, we are going to use a simple
form of event study based on CAPM model to study a recent event. In the second part, we are
going to conduct optimal portfolio construction. Please write a report with the following two
components:

(Additional note : if you would like to investigate another event that you are interested, you
are welcome to discuss with me and we can design a customized assignment for your group.)

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Component 1: Event study on Alibaba’s stock performance after a

big regulatory fine (12 marks)

Alibaba (9988.HK) is a one of the largest Chinese tech companies, and it has been listed in the
Hong Kong Exchange since 2019. Much like many other tech companies, Alibaba has been try-
ing to further extend its business into the credit lending market through its financial subsidiary,
Ant Group. However, in late 2020, Ant Group’s IPO was halted by the Chinese authority on the
last day due to financial market regulation concerns. Subsequently, the authority has launched
years-long anti-monopoly investigation on Alibaba, together with several other domestic tech
companies.
On July 7, 2023, the Chinese financial regulators issued a hefty RMB 7.12 billion (approxi-
mately $1 billion) fine against Ant group, and announced that most of the outstanding problems
associated with Alibaba’s financial business have been resolved. Despite the substantial fine
imposed, Alibaba’s stock price witnessed a notable surge following the announcement.
In this assignment component, you are invited to conduct a basic event study on the impact
of this event on Alibaba’s stock price, based on CAPM model. Details are described below

ˆ Please download the Excel file “FINM7008 Assignment Event study” on Wattle

ˆ First, we will use the historical monthly returns of Alibaba and Hangseng Index from Jan

2020 to June 2022 (data before the event) to estimate the beta.

– On worksheet “Estimate beta”, I have obtained the monthly returns of Alibaba,

Hangseng Index (as a proxy for market portfolio) from Yahoo Finance, and obtained
HK monthly risk-free rate from Hong Kong Monetary Authority. I have also com-
puted the excess returns of Alibaba and index.
– Please use the data provided and run a market model regression to estimate the
beta of Alibaba.

ˆ Second, the event date is July 7, 2023. We will use CAPM to estimate the Cumulative

Abnormal Returns (CAR) over a [-10, +10] time window around this event day.

– On worksheet “Event study”, I have prepared the daily returns for Alibaba, HangSeng
index, and also risk free rate, from Jun 23 to Jul 24. It includes the 10 days before
the announcement date, and also 10 days after the announcement date.

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 – On each day, please use the given returns, and the beta you just estimated, to
compute the CAPM implied expected return for Alibaba

E(ri,t ) = rf,t + β̂(rm,t − rf,t )

– Compute the abnormal return for Alibaba on each day

αt = E(ri,t ) − ri,t

– Accumulate the abnormal returns across the entire event window. i.e.

CARt=−10 = αt=−10

CARt=−9 = αt=−10 + αt=−9

CARt=−8 = αt=−10 + αt=−9 + αt=−8

...

CARt=10 = αt=−10 + αt=−9 + ... + αt=9 + αt=10

– Plot the cumulative abnormal returns. X-axis is the event window from day -10 to
day 10. Y-axis is the CAR. Please align the axis position on tick marks.

ˆ Important step: Up to here, you have conducted all the filed works for this event study,

and now please write a formal report to explain and summarize your findings and analysis.
In this report, please also

– Try to assume that your team is currently working in the research department of a
financial intuition, and your boss is waiting to see a professional report to explain:

1. What is the market reaction to this announcement, and why is that?

2. What is the implication for investment decisions

3. Why do you adopt this event study strategy, instead of simply comparing the stock
price before and after the event?

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 4. From the plot of CAR, please also discuss the efficient market hypothesis (will learn
in Week 7).

– Please try NOT to simply pile up answers in each step like exam answers.

ˆ Optional suggestion: I strongly suggest each team double check the calculations / regres-

sions before writing the formal report, you never want to write an otherwise excellent
report based on wrong results − and receive an unnecessarily low grade.

Component 2: Portfolio construction (8 marks)

In this second component of assignment, we will practice the portfolio constructions. To make
things easier, let’s only consider two stocks Alibaba and HSBC. Please prepare a report covering
the following analysis:

ˆ Please download the Excel file “FINM7008 Assignment Portfolio” on Wattle

ˆ Use the provided monthly returns, compute the monthly expected returns and standard

deviations of the two stocks Alibaba and HSBC. The correlation coefficient between them
is computed.

ˆ Next, assume the monthly risk-free rate is fixed at 1%. Please use these two stocks to

construct (1) a minimum variance portfolio and (2) an optimal risky portfolio. Please
show the weightings of each stock in these two portfolios, and compute the expected
returns and standard deviations of the portfolios. In addition, please include a plot of the
capital allocation line and display the locations of these two portfolios.

ˆ Discuss the benefits of holding this optimal risky portfolio.

ˆ Discuss your concerns of this optimal risky portfolio, and please also provide suggestions

to address such concerns.

ˆ Again, please try to write your report as a professional investment advisory report.

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2. Submission instructions

2.1. This submission is due by Friday 10 May 2024, by 5pm (Week 10), and is to be made
electronically via Wattle. Only one member of each group need to make the submission,
and it will show up for all members.

2.2. Important note: Please make two submissions on Wattle

– Submit to “Assignment submission” the following two files: A Word or PDF doc-
ument containing the written report, and an Excel file containing any calculations
undertaken within the assignment. There is no need to show detailed workings within
the report itself, but concise explanation of your methods, and usage of tables and
diagrams are expected.

– Please also submit your written report to “Assignment similarity check”, this is only
for the purpose of similarity check.

2.3. Please make sure your group information is correct.

2.4. Please name your files in the form of “Group ID + report/excel”, and include the Group
ID, all your names and student ID on the cover page.

2.5. Make sure your written report is sufficiently complete so that someone can easily under-
stand your findings and interpretation/discussion without looking any further. Do not
simply state “see Excel spreadsheet for the results”. Make sure you include discussion
throughout the report in reference to your findings. Although the Excel is required as
part of the submission, it will only be used to check the accuracy of calculations, and will
not be considered as substantive as the report when marking.

2.6. Please include a reference list containing any cited articles, and use subheadings where
appropriate. The reference list and any appendices are not included in the word limit.

2.7. Plagiarism is strictly not allowed.

2.8. Use a 12pt font size, and 1.5 or double line spacing throughout your document.

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Reporting free-rider or team conflicts:
Please start the initial work and workload allocation in your team as soon as possible.

ˆ Report to me before 3 May (Friday of week 9) if one of your team member is not responding

to any of the teamwork requests. Any inquiry regarding this issue after 6 May will not
be considered.

ˆ In case of disagreement of free-riding issue among team members, you can also report

to me before the due date 10 May. I will ask each member to submit a statement of
contribution in this assignment. Grade will be made based on contribution.

Important notice of academic integrity:

You can easily find many articles readily online that give you very detailed introduction and
analysis about this event. You are encouraged to read these articles which can quickly give you
a good idea, and it is part of the research process. But, please keep in mind that plagiarism is
strictly not allowed. You can find further information about how to use sources properly in
https://www.anu.edu.au/students/academic-skills/academic-integrity/using-sources

3. Useful resources

You will be provided with some of the data necessary to complete the quantitative aspects of
your assignment. However, there are also plenty of resources available which may assist you in
data searching and report writing
https://au.finance.yahoo.com/
http://www.anu.edu.au/students/learning-development/writing-assessment/report-writing
https://www.business.unsw.edu.au/Students-Site/Documents/Writingareport.pdf

You might use a lot of online resources for this project, while the citation of online resources
could be annoying. I find the following instructions from UNSW very helpful
https://www.student.unsw.edu.au/how-do-i-cite-electronic-sources

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4. Grading Criteria

Your assignment will be marked based on the correctness of the calculations, clarity and quality
of your discussion, as well as overall presentation, format and style of your written work. Please
ensure that you carefully proofread your assignment before submission. Guidance on the grading
criteria is provided in the table below.

HD D CR P
Quantitative Goes above and Solid demonstration Suitably applies the Basic application of
Application beyond to of quantitative skills minimum some of the
demonstrate with zero or minimal requirements. Some appropriate methods.
sophisticated errors. errors in application. Some aspects lack
quantitative skills at suitability to
this level. Tools used application.
are accurately applied.
Interpretation of Strong analysis and Excellent analysis and Describes the results Minimal
Findings discussion of the discussion of the well, beyond merely interpretation of
findings, findings. explaining the findings. Largely
demonstrating a Demonstrates an process. descriptive of the
thorough understanding of what process taken.
understanding of the the results suggest.
methods in context. Some evidence of
Evidence of ample background reading.
background reading.
Communication Exceptionally written, Well written, with All important Although most of the
argued, and formatted. some specific information is necessary information
Clearly articulated evidence provided to included, but some is included, written
with specific support ideas. disjoint throughout work lacks clarity
evidence, and a Appropriate style and the report. Format and/or numerous
smooth transition format. could be improved to spelling/written
throughout the report. facilitate flow. Some errors.
spelling/written
errors.