1. Download BOTH the Assignment Question file and Data file to complete your assignment.
2. Use Microsoft Word for the main assignment
3. Use Microsoft Excel wherever possible for numerical calculations and graphs/plots.
4. Copy and paste Excel outputs (e.g. plots, tables) into your Microsoft Word document (to protect the formatting of Excel output, use the “paste as picture” option in Word.
5. Submit the completed assignment (as a Word document) electronically via “Written Assignment Submission Point: Word Document ONLY” in the Assessment Task 2 folder.
6. Submit the Excel file used for calculations/estimations electronically via “Excel Workbook Submission Point” under Assessment Task 2 folder.
7. Keep a hard copy of the submitted assignment, in case there are problems with the electronic submission.
- Any answer in the Excel document, but not in the main Word document will NOT be marked.
- As this is an individual assessment, students should submit their own assignment. All assignments submitted will go through a matching process. If found to have cheated/plagiarised, all submissions will receive a mark of zero for this assessment item. It is up to you to keep your assessment confidential.
This Assignment consists of 4 parts. Attempt all parts.
Consider the following scenario:
You will be asked a series of questions to guide your analysis. You will need to manipulate the data to answer the questions below. Some Excel formulas are provided in the worksheet.
Part 1: Average returns [5 marks = 3 + 2 marks]
Compute the monthly return on the shares of each company and the ASX200 index by using the following formula:
where is the share price (or the value of ASX200 index) in time period . (Please note that you lose the first observation when calculating returns.)
(a) Using the monthly returns, calculate the average return on shares of each company from February 2015 – December 2017. Compare them with the average return on the ASX200 index.
(b) Suppose an investor created an equally weighted portfolio of these five companies (i.e. invested 20% of funds in each company). What would be the average return on the portfolio? Explain how you derived your answer.
Part 2: Volatility [9 Marks = 2 + 2 + 5 marks]
(a) Calculate the standard deviation of returns for the five companies. What does the standard deviation tell us about the overall risk of these companies?
(b) Compute the standard deviation of the equally weighted portfolio of these five shares. How does it compare to the standard deviation of the individual companies?
(c) How does the standard deviation of returns of the ASX200 index compare with that of individual shares and the equally weighted portfolio? Provide a brief explanation.
Part 3: Beta’s [6 Marks = 3 + 3 marks]
(a) Based on the data provided find an estimate of beta for each company.
For this you will have to first calculate the covariance of a company’s returns with the ASX200 index. Use the following formula in excel:
Beta’s can then be calculated by
(b) Briefly explain why each company has high/low values of beta.
Part 4 Forecast & Investment strategy [10 Marks = 7 + 3 marks]
The research department of Tri-Star Management has come up with the following forecast of the share prices and the ASX200 index for the month of June 2018:
They have also concluded that in 2018, the annual risk free rate is going to be steady at 1.5%.
(a) Based on the forecasts given above, write a short report for the clients of Tri-Star Management. Your report should be approximately 500 words long and contain: (i) an assessment of risk of each company, (ii) an evaluation whether a share is overpriced, underpriced or correctly priced and (iii) your recommendation regarding investment in these companies.
(b) Would you recommend the clients of Tri-Star Management to invest in an equally weighted portfolio of these five companies? Provide a brief explanation.