Portfolio Term Project Harvard Case Solution & Analysis

Introduction

            This term project paper attempts to compare the performance of two stocks that are listed on the S&P 500 index. The two stocks that have been chosen for this project are the stock of Pepsi Co and the Coca Cola. Both the companies belong to the same sector that is the consumer staples sector. The industry of both the companies is also same, which is the soft drink industry. The Cola Wars have continued since both the companies have become global players and due to their huge market share, risk exposures, strategies, market capitalization and growth prospects, these two stocks have been chosen for the detailed analysis of their stocks. The quote for Pepsi is PEP and the quote for Coca Cola is KO.

Data

            Weekly stock prices have been collected for both the companies for a period of two years starting from 1st August 2013 and ending at 29th July 2015. This way we have a data of around 24 months and 96 weeks of stock trading in the stock market. The starting and the ending dates have been mentioned along with the adjusted closing prices of both the stocks in separate spreadsheets. Similarly, the index prices for S&P 500 have also been extracted for the same period of 2 years and the price are collected on a weekly basis. All the data has been extracted from the Yahoo Finance website. The stocks prices are presented in ascending order in excel spreadsheet.

Returns of Both Stocks

            The returns for both the stocks of Pepsi Co and Coca Cola have been calculated in the third column using the simple return formula which is as follows:

Return = (P1 – Po)/ Po

            On the other hand, P1 is the current week price and Po is the previous week’s price. In this way the return between all the 96 weeks has been calculated for Pepsi Co and Coca Cola Company stocks. In the similar manner, the returns for the S&P 500 index have been also calculated. The mean return for the stock market is around 0.21% whereas; the mean returns for Pepsi Co and Coca Cola’s stocks are 0.19% and 0.09% respectively over the period of previous two years from the current date.

Simple Linear Regression

            The simple linear regression model is used to predict that how much the returns of one asset are dependent upon the returns of another asset. In this case, the simple linear regression model has been formulated in order to determine the significance of the dependency of the returns of Pepsi Co and Coca Cola on the returns of the S&P 500 index. Furthermore, the adjusted R square value will also be shown in the summary output, which would show that whether the models for both the stocks is a best fit or not. The interpretation of the simple linear regression for both the stock has been performed below.

 Pepsi Co

             In order to form the simple linear regression model for the Pepsi, the dependent variable is the returns of the Pepsi Company and the independent variable is the returns of S&P 500 index. The output for the regression statistics and ANOVA are presented below:

Regression Statistics

Multiple R

0.593842441

R Square

0.352648845

Adjusted R Square

0.346239427

Standard Error

0.013624324

Observations

103

ANOVA

 

df

SS

MS

F

Significance F

Regression

1

0.010213012

0.010213012

55.02042132

0%

Residual

101

0.018747842

0.000185622

Total

102

0.028960854

 

Coefficients

Standard Error

t Stat

P-value

Lower 95%

Upper 95%

Lower 95.0%

Upper 95.0%

Intercept

0.000616003

0.001354776

0.454690148

0.650307945

-0.002071507

0.003303514

-0.002071507

0.003303514

0.013906267

0.671841725

0.090574306

7.417575164

3.80339E-11

0.492166665

0.851516784

0.492166665

0.851516784

             First of all, if we look at the regression statistics table then it could be seen from the value of R, which is 59% approximately that there is a moderate to strong relationship between the returns of the Pepsi and the returns of S&P 500 index. Moreover, if we look at the adjusted R square value then it could be seen that that the value stands at around 35%. This shows the percentage dependency of the stock returns over the S&P 500 index returns. It could be seen that this dependency is near moderate.Portfolio Term Project Case Solution

            However, in order to test that whether this dependency between the stock returns and the market returns is a significant and whether the regression model is best fit, the next table needs to be interpreted which is the ANOVA table. In this table, if we look at the significant value of the regression model developed between the Pepsi returns and the S&P 500 index returns, then it could be seen that the significant value is 0% which is less than 5% and it shows that there is a significant dependency of the returns of Pepsi on the returns of the stock market. Hence, this model is best fit for the prediction of the future returns of Pepsi’s stock........................

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