25705 Financial Modelling And Analysis :(AllOrd)

The All Ordinaries (AllOrd) contains the 500 largest listed companies on the ASX. Its volatility represents the broad market risk in the Australian stock market. In this case study, students will analyse the characteristics of the All Ordinaries Index and forecast its monthly volatility. Several variables related to the All Ordinaries Index are contained in the file “CaseData.xlsx” which can be downloaded from the subject website under “Case Study”. Variable definitions are provided in the data file. Students are encouraged to seek additional data to facilitate their analyses. The total mark for the case study is 100 and accounts for 20% of the overall subject mark. Calculate the monthly stock returns (AOret) as the percentage changes in AllOrd. Plot AOSD (vertical axis) against AOret (horizontal axis). Summarize three key characteristics of the relation between AOSD and AOret. Use the “CORREL” function in Excel to calculate the correlation between AOret and AOSD. Based on the plot of AOSD against AOret, discuss what the correlation measures and fails to measure. Give one potential explanation for the sign of the correlation between AOSD and AOret.

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