QUESTION
This assignment involves one case problem and it carries 20% of the marks allocated for
this subject. You will be required to complete this assignment in teams of three. If you
do this assignment as an individual assignment, the maximum mark you will get is 1/3
of 20%. If your group has only two members, the maximum mark awarded to each
member will be 2/3 of 20%. When a group has four members or more, the maximum
mark a group member can score is 20/number of group members. However, where a
group cannot have three members due to circumstances beyond group members’
control, the unit coordinator may decide to award full marks to a group. To answer the
questions, you will be given the following data:
1. S &P/ASX 300 Index of the Australian Stock exchange (ASX).
2. Adjusted monthly share prices for three companies listed on the ASX assigned
to your group for the period January 2009 to December 2010. The shares of
these companies should have been traded in all months during the sample
period, and
3. Yield on 3-year government bonds for the same period mentioned above.
Assignments are to be uploaded to the WebCT before 11.59 pm on the due date. A hard
copy that should be stapled in the top left hand corner should be handed into the tutor on
the same day during the tutorial class. However, your unit coordinator may give you an
extension of submission date for circumstances beyond your control. He may ask you to
provide acceptable documentary evidence to support the extension. Assignments
received after the due date will be penalised at the rate of 2 per cent of the marks
obtained per day unless an extension has been obtained.
Note that marks will be allocated towards presentation. It is also a requirement that all
assignments be submitted with the relevant cover sheet. Assignments will not be
accepted or marked if they are lodged without a cover sheet. The other documents you
have to submit are an Excel sheet where you show how you have performed calculations
to answer each question and a statement saying that each member of the group has
contributed equally to the assignment. The above statement must be signed by each
member of the group.
It is your responsibility to keep hard and soft copies of your assignment submitted until
you receive the marks and to retain the marked assignment until the final examination
marks are released.
Your assignment will be subjected to a plagiarism check before your tutor starts
marking it. If plagiarism is detected, you will be penalised according to VU policy with
respect to plagiarism. Penalty will be applied equally to each member of your group. It
is also very important that only your group leader upload only one assignment to the
WebCT. If a group uploads multiple assignments, your plagiarism score will be 100 per
cent as the software counts each assignment as a separate assignment.
The assignment requires each team to undertake independent research.
On the basis of your analysis you are required to answer the following:
1. Calculate continuously compounded monthly holding period returns for the
period ending December 2010 for the three companies.
2. Calculate the average continuously compounded monthly holding-period returns
and the standard deviations of returns for the S &P/ASX 300 Index and those forthe companies.
3. Plot the continuously compounded monthly holding-period returns for the
companies against those for the S &P/ASX 300 Index.
4. From your graphs in Question 3, describe the nature of the relationship between
the share returns of each company with those of the S &P/ASX 300 Index.
5. Assume that you have decided to invest equal amounts of money in shares of
each company. Calculate the continuously compounded monthly holding-period
returns for your share portfolio and its standard deviation.
6. Plot the returns for your share portfolio against those for the S &P/ASX 300
Index. How does this graph compare with the graphs for the individual shares?
Explain the difference.
7. Calculate the average of the continuously compounded monthly holding-period
returns and the standard deviation for the three-share portfolio.
8. Make a comparison of the average returns and the standard deviations for the
individual assets (each of the shares and the 3-year government bonds) and the
share portfolio. What conclusions can be reached from your comparison?
9. Now assume that you have decided to invest 75 per cent of your money in
individual shares and the balance in 3-year government bonds. Calculate the
continuously compounded monthly returns for your portfolio. What are the
average return and standard deviation of the above portfolio?
10. Calculate the betas for each company. Then compute the beta of the portfolio
you formed in question 5.
11. Interpret the standard deviation of the portfolio returns you calculated in 5 and
the beta of this portfolio.
12. Estimate the annual required rate of return for each share.
13. Estimate the share price of each company using an appropriate model and
explain what action you would take in relation to your investment in each share
(sell, buy more, do not sell or buy). Assume zero growth in dividends.
SOLUTION
1) Daily returns (in the form of %) of each share have been calculated. AM is used for calculation .GM is the best measure but due to negative returns GM has been not used. And direct using compounding can also create problem.
2) Since October, November and December data is not given in the assignment on the separate basis .So, the work has been done on the assumption basis. The assumption is that average days have been distributed over these three months.
3) Day to day data of S&P/ASX 300 has not been given. A lot effort has been used but I did not get daily data of ASX.I got monthly data of AXS and I made to do with this data.
4) After calculating average of monthly return, compounding has been used to find out yearly return.
5) SD has been calculated on the basis of monthly return.
6) Co-Var has been calculated on the basis of monthly return.
7) Graphs are drawn on monthly return of shares and ASX.
8) Betas are calculated using formula, Co-var of each shares with market divided by variance of the market.
9) Bond rate or risk free rate has been taken from Australian market which is 5.2%.
10) Required rate has been calculated using CAPM formula.
Required rate of return= Risk free rate + beta of share*(market return-risk free rate)
11) Buy, sell or hold decision is done after comparing required Rate of return and return of respective security.
GF60
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