Calculations and Interpretation of Stock Returns and CAPM Model

STATISTICS
STUDENT NAME/ID
[Pick the date]

PART A: CALCULATIONS
TASK B
(1) The stock return (i.e. Boeing and General Dynamics) along with index return has been
calculated in accordance with the formula outlined. The underlying result is shown below.
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It needs to be ascertained if the distribution corresponding to the returns for the two stocks (i.e.
BA and GD) is normal or not with the application of Jarque Bera test. The relevant hypotheses to
facilitate this test are illustrated as follows.
H0 (Null Hypothesis): For the underlying stock, the distribution is not different from normal
distribution in a statistically significant manner.
H1 (Alternative Hypothesis): For the underlying stock, the distribution is different from normal
distribution in a statistically significant manner.
α or significance level assumed for the test is 5%.
The test statistics of relevance would be JB statistic which may be computed using the formula
illustrated below.
The key inputs for the computation of JB statistic is in the form of skew and kurtosis pertaining
to the underlying returns of the stock. The underlying JB test statistic for the two stocks whose
distribution is being tested is exhibited below.
The corresponding critical value of JB statistic is 9.87.
Since JB test statistic for each of two stocks > critical, hence the available evidence warrants
rejection of H0 in favour of H1. It would be fair to draw the conclusion that distribution of returns
for both Boeing and General Dynamics tend to deviate from normal distribution and thereby
cannot be assumed as normal.
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