The FTSE 100 index comprises of 100 largest companies in terms of market capitalisation, listed on the London Stock Exchange. It is maintained by FTSE group, a subsidiary of London Stock Exchange and was launched in 1984.
FTSE 100 index is a good indicator of international and local economic conditions as it responses in changes to not just the local market but to markets all over the world. Companies included in the FTSE 100 represent about 80% of the total market capitalisation on the London Stock Exchange. Market capitalisation (size) of the index makes it a good sample to use in examining the cross section of average stock returns in the UK. Data and financial information about these FTSE 100 companies is more readily available in comparison
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Such studies have usually focused their research on a stock market within a particular country. There are plenty of studies on the UK stock market as well. These studies generally conduct studies over a considerably long periods of time and involve mostly all companies in the UK. Due to insufficient data many companies are left out of sample which makes the sample an inadequate representation of UK market.
Moreover, some of the earlier research involves few variables in the estimation model. The two variables most commonly involved are, market risk (Beta) and market capitalization. Inclusion of leverage and book to market equity will provide a clearer understanding of the explanatory variables and make the estimations more robust.
Research questions act as a roadmap which directs the researcher and helps staying focused on the topic. They assist in determining the scope of the study and act as a catalyst for thinking in the right direction by asking questions like: Where to get the relevant information and data from? How to ensure the data is trustworthy? Which methodology or model will be most appropriate?
1.2 Aims and
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In addition, we examine whether the variables are significant or not and should therefore be considered or left out of investment decisions.
1.3 Research Questions
Research questions help us by guiding in the right direction so that research is manageable, relevant and ultimately provide sufficient scope to form up a research report.
The questions this research looks forward to answer is as follows:
Can the cross-sectional predictability of average stock returns of FTSE 100, be explained from beta, size, leverage, book to market equity and price earnings ratio. This is not only carried out for individual stocks but also applied to an industry level analysis to test whether the results stand true for individual stocks as well from an industrial perspective.
1.4 Structure
This paper is made up of 5 chapters and is its components are organised as mentioned below:
Chapter One - Introduction: The first chapter gives an overview of the topic along with some background information and objectives of the
The first financial ratio of the analysis is the Price to Earnings ratio (“P/E ratio”). The ratio is computed by dividing the price of one share of common stock, by the earnings per share of common stock. This analysis uses diluted earnings per share which assumes the issuance of new stock for all existing stock options. Also, the price of the stock was computed as an average of the fourth quarter high and low stock prices published in the 10K report of each company, because the year end stock prices were not listed for all the companies. Because the P/E ratio measures the relative costliness of different stocks, in relation to their income, it provides a useful place to begin the analysis.
The preceding was provided so that the student could gain an understanding of the paper. The complete paper begins below:
The research question is the first and foremost initial step in the research process, because it defines the expected outcomes and drives the project design. So it should be clear and concise once the research question is formulated, the next is defining the terms and concepts used in the research process. A literature review is needed to clarify issues, gives an understanding to the researcher how others have formulated similar research questions and defines concepts.
Context of the introduction is accurate to the content of the sources and purpose is provided. Conclusion summarizes major elements of the paper and reiterates the purpose.
When discussing the cost of equity capital, or the rate of return required by investors for their share expenses, there are three main models widely used for analyzation. These models are the dividend growth model, which operates on the variable of growth and future trends, the capital asset pricing model (CAPM), which operates on the premise that higher returns are a result of higher risk, and the arbitrage pricing theory (APT), which has a more flexible set of criteria than CAPM and takes advantage of mispriced securities
Secondly, as one of the most well developed stock market, UK market locates in the similar developing stage as US market does, adequate data ensure the reliability of the research. Finally, both USA and UK market play a critical role in modern financial system, experience from these two markets could be contributive.
Part one will be an abstract page. It will be the first page with less than 50 words. It is a brief overview of the entire report. Part two is the research paper. Made of an introduction, body paragraphs, conclusions and recommendations.
In theory, market capitalisation weighted indices are preferred as compared to equally weighted indices due to the fact that they are superior proxies and are consistent with the true market portfolio. Some practitioners argue that there is a perceived segmentation between the Resources, Financial and Industrial sectors on the JSE and consequently prefer to use the Financial and Industrial Index as an overall market proxy for stocks belonging to this category. Choosing the correct market index in order to regress against, is a vital aspect. Stambaugh (1982) identifies that the CAPM tests are generally insensitive to the choice of market proxy. However, many believe that the broader the selected indices, the better the market proxies. In the UK market, the two main indices used are the FT 100 which is made up of the top 100 companies and the FT All Share Index which is made up of all companies traded on the exchange.
Stock market prediction is the method of predicting the price of a company’s stock. It is believed that stock price is lead by random walk hypothesis. Random walk hypothesis states that stock market price matures randomly and hence can’t be predicted. Pesaran (2003) states that it is often argued that if stock markets are efficient then it should not be possible to predict stock returns. In fact, it is easily seen that stock market returns will be non-predictable only if market efficiency is combined with risk neutrality. On the other hand it is also been concluded that using variance ratio tests long horizon stock market returns can be predicted....
The following essay will expand on the usefulness and flaws of CAPM and other asset evaluation frameworks and in the end showing that despite all the evidence against CAPM it is still a useful model for determining asset investments.
Donley (2012) suggest that good research question should be clear and focused. Although the article title is within suggested word count (11 words) it is not clear of what exactly is being explored. Title of
According to Hagan (2010), research plays a critical role in social sciences. Apart from being a source of new information which expands on the scope of the current knowledge, research is used to identify gaps which may exist in current practice, policies, and to find means to close those gaps. For research in social science and in specific in criminal justice to be carried out, it's important to identify a research problem which the study will address. According to Nelson (2016), a research problem is a statement in the research which explains the problem the research seeks to address. Apart from being a general problem, a research problem can be a gap which exists in previously conducted researches which the new study would seek to address.
Methodology, theoretical foundation, ethical considerations, and contribution to society are components the researcher needs to address. Topics for research are based on subjects near and dear to the researcher; they can be issues directly affecting their work, community or organization.
In turn everything in the present and the future is judged through the stocks as they hold a high importance in industrialized economies showing the healthiness of said countries economy. As investing discourages consumer spending over all decreases, it lead...
Research is systematic way to find out facts and knowledge as Kothari (2006) has analyzed that research is the pursuit of truth with the help of study, observation, comparison and experiment; the search for knowledge through objective and systematic method of finding solutions to a problem. However there are two types of researches one is by Purpose and other is by method. The type by purpose falls into three categorize such as Basic, Applied and Action Research.