The TS 2026 BUS329 assignment asks Murdoch students in Singapore to measure how much of a listed stock’s risk comes from the market and how much from the company itself. Each student runs a single index model regression for one firm, and the group compares all firms and explains how diversification removes firm-specific risk.

What You Are Expected to Do

1. Regression Estimation

Run an Ordinary Least Squares (OLS) regression on your monthly returns using the Single Index Model:

R_i,t = α_i + β_iR_m,t + e_i,t

• R_i,t = return of firm i at time t (dependent variable)
• R_m,t = return of the market index at time t (independent variable)
• α_i = intercept
• β_i = slope coefficient (market beta)
• e_i,t = residual / firm-specific error term at time t

2. Risk Decomposition

Using the regression output, decompose the total variance of the stock into its two parts: σ²_i = β²_iσ²_m + σ²(e_i).

• Calculate total stock return variance (σ²_i) and total market index variance (σ²_m).
• Compute systematic risk (β²_iσ²_m).
• Compute unsystematic / firm-specific risk (residual variance σ²(e_i)).
• Verify that the ratio of systematic risk to total risk equals R².

3. Results and Critical Analysis

• Beta analysis: is the stock defensive (β < 1), aggressive (β > 1) or neutral (β = 1)? Does this match the fundamentals and cyclicality of the firm’s industry?
• Alpha and statistical significance: what is the estimate of α, and is it significantly different from zero (p-value / t-statistic)? What does this imply about excess performance relative to the market over the sample period?
• Risk breakdown: what percentage of variance is explained by market movements (R²) and what percentage by firm-specific events (1 − R²)? Identify 2 to 3 major company-specific news events in the 5-year sample (earnings announcements, regulatory shifts, CEO changes) that explain large spikes in the residuals.
• Portfolio context: how can an investor eliminate the firm-specific risk identified in your model?

Structure of the Report

1. Executive summary (group, max 300 words): overview of the company, proxy index, period and headline findings.
2. Introduction (group, max 300 words): purpose, the selected firms, the analytical approach (intra-firm analysis then inter-firm comparison) and report structure.
3. Methodology (group): data sources and formulas used.
4. Regression and risk findings (individual): regression tables, α, β, R², variance decomposition percentages, and a scatter plot of market return (x-axis) against stock return (y-axis) with the fitted characteristic line.
5. Discussion and qualitative evaluation (individual, max 300 words per student): link the statistical outputs to macroeconomic factors and firm-level events, with emphasis on firm-specific risk (residual plot) and 2 to 3 news events that match residual spikes.
6. Inter-firm comparison (group, max 500 words): compare β, α and the systematic versus firm-specific risk split across the selected firms, how they behave together in a portfolio, and how diversification removes firm-specific risk.
7. Conclusion (group, max 300 words): key empirical results and actionable takeaways for a portfolio manager.

Other Guidelines

• Total word limit 2,300 (excluding cover page, tables, figures, references and the Excel workings file).
• Word document, Times New Roman 12 pt, 1.5 line spacing, 2.54 cm margins; APA 7th edition or Chicago referencing; university assignment cover sheet.
• Submit an Excel/Google Sheets file (raw monthly prices, percentage returns, OLS output and risk decomposition, clearly labelled), the written report and the group project plan from the LMS.
• AI may be used only to understand terminology, find and summarise research papers or format references; drafting or polishing text with generative AI is treated as academic misconduct.