Investment and risk are the two sides of a same picture, and there are no two ways to find the close relationship of both of these variables in a perfect manner (Anderson & Styan, 1990). The tradeoff of investment and risk is highly effective for an investor, because an investor would be more cautious about the association and addressing of risk, rather than of yield. Risk or deviation can also be termed as volatility in the field of finance, and the computation related to the same would be extremely critical.
During the current global financial crisis (GFC), there were numerous indexes that downgraded heavily, and among those indexes there was a name of Financial Times Stock Exchange (FTSE)-100 Index as well. As per the analytical framework, FTSE-100 Share Index reached a peak of around 6,700 points in October 2007, and then fall to a level of 3,500 points in the year 2009, however it moved perfectly again to reach on the initial level in May 2013. The main theme of this assignment is to address the volatility of the FTSE-100 Index by applying sophisticated and complex statistical tools and methods. There are three different parts of this assignment that needed to be complete in this analysis, which will be discussed in the analysis and finding section.
Analysis & Findings
The first section of this report depends upon the personal commitments and intentions to select the data for the analysis purpose of the volatility (Ashby, 2011). The main question which the group has decided to examine is to analyze the volatility of the FTSE-100 in a definite time period. The group decided to address the question on the basis of the huge volatility occurred in the share index data of financial time’s stock exchange (FTSE). It is an important analytical question which is still under critical observations to analyze the total volatility and deviations encountered by the investors at that time, and now how much they are getting in terms of riskiness. The share index which our group has chosen for the study is Financial Times Stock Exchange (FTSE-100) Index. The main reason behind selecting this particular index is very clear, as it is one of the largest stock exchanges of the United Kingdom (UK), in which 100 most financially active and viable companies included in it. Apart from this reason, there is another reason associated specifically with the selection of this particular index, which is that the index had confronted heavily volatility during the current economic downturn, and then reached on its original position after a matter of some years (Ashby, 2011). Both short and long term benefits and volatility would have been analyzed accordingly in this particular analysis. Both short term and long term volatility are important to analyze accordingly in particular. The data that would be used for the short term volatility analysis is from 2007 to 2009, and the long term volatility would have been analyzed on the data set which is from 2007 to 2013. Our group worked extremely hard to accumulate all the data for the analysis purpose, as the core competency of this assignment depends upon the data accumulation, and how to analyze it in a perfect and organized manner. One of the basic reasons behind selecting FTSE-100 Index is that the availability and finding of data can be extremely effective.
- Obtaining and Analyzing the Data
Data collection and analysis is one of the most important aspects that relates to an organization, and for this assignment the stance of accumulating the data is extremely vital and important. The assignment revolves around the analysis of the volatility of FTSE-100 Index for both short and long term; hence huge amount of data would be required to complete the analysis in a perfect and organized manner (Härdle & Simar, 2012).
Our group has obtained all the data from the website of Yahoo Finance. It is one of the most authentic website to get the financial results of a company as well as the behavior of financial index. The core plan is to analyze the level and extent of volatility examined in the analysis of FTSE-100 Index from a definite time period.
Volatility or risk denominates the same thing, as it analyzes the level and amount of deviations from the mean of a company. The essence of volatility is extremely essential from the standpoint of stock and investment analysis, as investors can analyze the level of volatility accordingly. In the field of finance and statistics, some of the major tools and computation that can be taken into consideration for the analysis of volatility are Mean and Standard Deviation (SD) (Härdle & Simar, 2012). Both of these tools would be used for the same analysis in this section as well to calculate the level of volatility in both short term and long term analytical process.
Mean is an alternative to average, and it is one of the most important types of statistical model used by the analysts to reach on a certain course of action. It will analyze the average analysis of a certain aspect. In this aspect, wherein the analysis is based upon the volatility, mean or average of volatility in the respective time period would be analyzed accordingly (Keilegom & Wilson, 2011). On the other hand standard deviation (SD) is an important statistical tool used to examine the level of variation or deviation from the mean. In the field of finance, standard deviation analyzes the level of risk accordingly. Both of these statistical measures would be used in this particular analysis accordingly. Apart from these statistical methods and functions, hypothesis testing would also been used accordingly (Keilegom & Wilson, 2011). Hypothesis testing is all about analyzing the behavior accordingly on the basis of two different aspects. It is purely based on the assumptions, however there are some methods from which this particular thing can be examine, and the hypothesis on which this entire analysis is based upon is as follows
HO (Null): There is no volatility in the FTSE-100 from 2007 to 2009
H1 (Alternative): There is volatility in the FTSE-100 Index from 2007 to 2009.
The short term volatility in the FTSE is not as high; however it may be high in the long term analysis. The long term analysis of volatility of FTSE-100 Index is as follows
It can be clearly seen that the standard deviation of FTSE in $ term is high in short term volatility; however it is comparatively lower in the long term analysis. The same aspect can be found in the mean return %, as the mean return was in negative in short term and it is positive in long term.
- Presentation of Result
The question on which this entire assignment based upon is about volatility in the assignment in short term and long term. Mean, Standard Deviation and hypothesis testing has been done in an effective manner. From the short term volatility analysis, it is computed and found that the mean FTSE index value was $ 5,136, while the mean yield in terms of percentage is -1.0075%. On the other hand, the dollar value of deviation of FTSE-100 Index is 868, which means that the index has the chance to deviate from the mean from an amount of 869. However, the percentage value is change as well, as in terms of percentage; the deviation is proportionate to 6.090% that means that it has the chance to deviate from the mean by 6.09%.
In terms of long run, the mean return and standard deviation in terms of percentage are 0.1249% and 4.76% respectively, covering a period from 2007 to 2013. It is found that the level of deviation actually decreased when analysis have been formed for a long term basis particularly. It means that FTSE-100 index performed comparatively well in the long run, as compared to short run because of volatility.
In terms of hypothesis testing, Statistical Packages for Social Sciences (SPSS) has been used, and the computed result is showing the significance value is 0.069, which is higher than the level of 0.05. It means that null hypothesis should be rejected, and conversely, it is required to accept the alternative hypothesis. In short Alternative hypothesis is selected, which is showing that there was a serious volatility found in the prescribed dates in FTSE-100 Index.
The Financial Times Stock Exchange (FTSE), also known as FTSE-100 is a share index of the top most financially viable companies of the United Kingdom (UK), listed specifically on the London Stock Exchange (LSE). FTSE is the most widely used stock exchanges in the UK, and it is also used heavily for the analysis purpose. The market capitalization of this particular index is very high which £1.549 trillion is in the year 2012. The exchange found a serious time during the current economic crisis, as most of the value in terms of points have been decreased drastically. In this assignment, it is required to analyze the volatility of FTSE-100 Index in both short term and long term accordingly, in a definite time period like from 2007 to 2009, and then from 2007 to 2013. It is found from the analysis, that there were serious volatility analyze in both of these time periods in FTSE-100 Index.
Anderson, T., & Styan, G. (1990). The collected papers of T.W. Anderson, 1943-1985. New York: Wiley.
Ashby, F. (2011). Statistical analysis of fMRI data. Cambridge, Mass.: MIT Press.
Financial Times Stock Exchange (2014), [Online], retrieved from https://uk.finance.yahoo.com/q/hp?s=%5EFTSE&b=1&a=09&c=2007&e=30&d=09&f=2013&g=m Accessed on 2014-Nov-07th
Härdle, W., & Simar, L. (2012). Applied multivariate statistical analysis. Berlin: Springer.
Keilegom, I., & Wilson, P. (2011). Exploring research frontiers in contemporary statistics and econometrics. Berlin: Springer/Physica-Verlag.