TRANSNATIONAL INVESTMENTS, INC.

In your report to your supervisor please include answers to the following five questions:

Q. 1. Your data indicates that the stock market indices of all the countries studied increased between 2005 and 2006. Unexpectedly, interest rates for all but one country also increased during that period. Perhaps this is partially due to the positive inflation rates in all of these countries. You would like to find out more information. However, there are variations in the direction and in the size of these changes for each country and this complicates your analysis.

The stock prices.xls Excel spreadsheetshows the change in stock market indices between 2005 and 2006 as a percentage of the 2005 indices. It also shows the change in interest rates between 2005 and 2006 as a percentage of 2005 interest rates. Use Excel to calculate the mean and standard deviation for the percent changes in market indices. Perform the same calculations for the percent changes in interest rates. What do these numbers indicate

B. Conduct a hypothesis test to see if the mean percent change in stock market indices between 2005 and 2006 is significantly different from zero. Do this without Excel. Conduct the same test for the mean percent change in interest rates. Use a significance of .03. How do you interpret your findings

TRANSNATIONAL INVESTMENTS, INC.
Transnational Investment, Inc. (Transnational) provides global financial services to businesses and
individuals. It invests in international markets, primarily by buying and selling stocks, on the New York,
London, and Tokyo exchanges. As an employee, you have been asked to evaluate a proposed method
of global investing. The firm will use your study as a basis for recommending global investments to its
clients.
The rise of the global economy has changed the way investment firms manage their portfolios. The free
flow of savings and capital across national borders allows today’s investment firms to diversify their stock
portfolios by transacting in the stock markets of foreign countries. Many financial analysts believe that
global investing hedges their risk exposure to a particular country because the economic performance of
countries can differ. For example, the U.S. economy boomed from 1991 to 2001, while the Japanese
economy remained in a deep recession. Holding stocks in multiple countries can diversify such countryspecific
risk. In any given period, some countries may slip into recession while others may move toward
rapid growth.
Investment firms must decide which foreign markets to invest in when diversifying their portfolios. In one
method of global investing, advocated by a number of your colleagues at Transnational, macroeconomic
variables are used to guide the selection of stocks. Economic indicators, such as interest and
unemployment rates, are used to predict when the stock market in one country may outperform the stock
markets in other countries. The theory is that market prices would be related to these economic
indicators. Thus, an analyst must determine which indicators are best for predicting market performance.
Not all of the financial analysts at Transnational subscribe to this method of global investing. Some view
investing in international stocks, especially in emerging markets, as one of the riskiest forms of
investment. They also believe that economic indicators are not good predictors of future stock market
returns. Instead of relying on macroeconomic variables, these financial analysts use the performance of
individual firms to guide their selection of stocks.
Based on your research, you have concluded that statistical analysis is needed to assess whether
investment decisions should be guided by macroeconomic data. Your research has also uncovered that
there are a number of macroeconomic variables available to test the relationship between stock market
performance and economic performance in a country. These variables include inflation, per capita gross
national income (GNI), the unemployment rate, and interest rates.
Previous empirical work has shown that interest rates might be an important factor in explaining a
countrys stock market performance. The primary reasons are fairly straightforward. The current price of
a share of stock is the value today of owning the rights to a stream of future expected profits. The future
expected profits must be discounted by the existing interest. If interest rates rise, the present value of a
future expected earning is smaller. (At a higher interest rate one could invest a smaller amount today to
get back the equivalent of the expected future profit.) A rise in interest rates is therefore often (though not
always) associated with a fall in stock prices. Secondly, if the interest rate that a firm must pay to borrow
is increased, and nothing else effecting future profits has changed, the higher cost of borrowing may
lower expected future returns. Lower expected returns would also lower the stock price today.
You want to test the hypothesis that national interest rates are a good predictor of a countrys stock
market performance. To test this hypothesis, and to investigate other ideas, you have collected the data
in Table 1. The eighteen countries listed all have branch offices of Transnational Investments. (These
data are also available in a downloadable Excel file named stock prices.xls on the course web site.)

Copyright 2009, Richard Gunther, Richard Tontz, and Shahid Ansari
Table 1
Selected Economic Statistics for 2005 and 2006 by Country*
Country
2005
Market
Index**
2006
Market
Index
2005
Interest
Rates***
2006
Interest
Rates
2006
Per Capita
GNI 1000’s $
2006
Inflation
Rate
2006
Unemployment
Rate
Australia 312.5 400.6 5.46 5.81 35.86 3.5 4.8
Belgium 321.2 427.5 2.02 2.73 38.46 1.8 8.2
Canada 369.4 425.7 2.73 4.03 36.65 2.0 6.3
France 273.3 365.7 2.03 3.05 36.56 1.6 9.2
Germany 224.3 302.8 2.03 3.08 36.81 1.7 9.8
Indonesia 79.0 128.0 6.78 9.18 1.42 13.1 NA
Italy 213.8 280.6 2.17 3.18 31.99 2.1 6.8
Japan 113.5 115.8 0.01 0.12 38.63 0.2 4.1
Malaysia 119.5 158.9 2.48 3.23 5.62 3.6 NA
Mexico 360.1 501.0 9.20 7.19 7.83 3.6 NA
Netherlands 309.6 401.8 2.02 3.07 43.05 1.1 3.9
Singapore 176.3 249.4 2.04 2.95 28.73 1.4 NA
Spain 288.6 422.1 2.19 3.26 27.34 3.5 8.5
Sweden 378.3 542.6 1.72 1.75 43.53 1.4 7.0
Switzerland 452.5 577.6 0.71 1.36 58.05 1.1 4.0
Thailand 76.7 81.3 2.62 4.64 3.05 4.6 NA
United Kingdom 217.6 278.3 4.55 4.65 40.56 3.2 5.3
United States 302.4 343.2 3.15 4.72 44.71 3.2 4.6
* Source: U.S. Census Bureau and United Nations
** Dow-Jones World Stock Index
*** Treasury Bill Rates, if NA Money Market Rates
Required
Prepare a report for your supervisor to carefully explain your findings. (Follow the writing guide for a
report posted on the class website).
In preparing your report be sure to review statistics concepts 1, 2, 3, 4, and 7 as well as macroeconomic
concepts 2, 3, 4, and 7.

Book reference:

McShane, S. L., & Von Glinow, M. A. (2013). Organizational behavior: Emerging knowledge, global reality (6th ed.). New York, NY: McGraw-Hill/Irwin.

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