FINANCE (Portfolio Management) 301

Semester 2, 2014 – Group Assignment

Instructions

1. This is a group assignment. Each group will consist of three students and each group will submit one joint report.

2. In doing this assignment, you are encouraged to refer to the texts, the reading material in Blackboard and any other material that may assist you in understanding what you are doing in this assignment. Group members are expected to actively discuss and work among themselves but not refer to the work of any other groups. Any collusion of this form will be treated seriously and penalised.

3. Please ensure that each member in a group makes an equal contribution to the assignment, as far as possible. Free riders should be reported to me and may be penalised.

4. You are expected to make this assignment an opportunity to develop you spreadsheet computational skills. Make use of Excel or any other computer spreadsheet of your choice to do your calculations and graphs.

5. Assignments must be typed and neatly presented in a professional report format. The results or summaries of your calculation and your comments must be shown in the body of the report. Make sure the formulas or methods used for your computations are clearly shown. The data collected and details of calculations can be shown as appendices to the report. Make your report look professional and reader friendly. The length of the report should not exceed 10 pages (Excluding the appendix). Use 12 point font size and standard margins.

6. Ensure that you give adequate cross references to the sources from which you have gathered data or information in compiling your report. ( minium20 references)

7. The criteria used in assessing your marks on this assignment will include:

Computational accuracy,

Relevance and accuracy of the interpretation of results,

Demonstration of your understanding of the underlying theory,

Neatness and style of presentation.

8. Assignments are due on the 26th October by 12:00pm. Late assignments will attract a penalty of 10% per day.

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Pick three stocks of your choice (Select stocks listed in the ASX or any other national Exchange), preferably from different industry groups. Go to the recommended websites or any other website that offers historical stock price data or to published information sources such as Yahoo Finance, or any other source of financial information. Extract weekly (for example, every Friday) closing share prices for the most recent 28 weeks

Extract also the values of the stock market index, (represented by the ASX 300 or ASX 200 Index in the case of Australia), on a weekly basis over the same time period.

Calculate the following:

Part 1 (30 marks)

(a) The rate of return in each week for each stock and for the stock market index for the 27 weekly periods. Calculate the discrete rate of return as well as the continuously compounded rate of return. Calculate the arithmetic mean return and the geometric mean return of each stock for the entire period. Use only the discrete returns for your calculations and for the calculations in the questions that follow. (10 marks)

(b) The variance of returns for each stock and the index and the covariances of returns between each pair of stocks, the covariance between each stock and the stock market index, and the corresponding correlation coefficients. (5 marks)

(c) Compare your results in (a) and (b) for each stock and the stock market index and comment on the risk return characteristics and performance of each of your stocks and the index. Illustrate with tables/charts as appropriate. Comment on the results, relating to what you have learnt in this course. Relate the risk return pattern and the performance of the market index and your stocks to relevant events that took place during this period. Draw on economic, political, industry and company related events that took place over this period that may have impacted on the performance of your stocks and the market index. Give bibliographic references to the sources of your information. (15 marks)

Part 2 (10 marks)

(a) Based on the discrete returns calculations in Part 1, compute the weekly rate of return and the variance of an equally weighted portfolio formed from the three stocks. Make use of your knowledge of matrix algebra in your calculations. (5 marks)

(b). Examine and compare the pattern of the returns of your portfolio with those of the individual stocks, and the stock index. Compare the corresponding variances. Comment on your observations, relating to material learnt in this course. (5 marks)

Part 3 (45 marks)

(a) Extract for each week, the yield of the 26-week Treasury bill (or equivalently the 90 day or 180-day bank accepted bill (BAB) rate) from the financial media (i.e. RBA website http://www.rba.gov.au/statistics/tables/index.html#interest_rates) over your sample period. (Remember that reported yields are usually annualised figures.) Convert the yields to weekly numbers. Use these as a proxy for the risk free rate.

(5 marks)

(b) Estimate the Security Characteristic Line (SCL) for each of your stocks and the equal weighted portfolio, based on the ‘Market Model’, using excess returns (discrete returns less the risk free rate), using Excel regression analysis functions. Show your results graphically. From your results, compute the Beta and the Jensen’s Alpha of each stock and the portfolio. (15 marks)

(c) Calculate the total risk (the return variance) of each stock and the portfolio. Partition the total risk to their respective systematic and unsystematic risk components. (10 marks)

(d) Based on your observations and results in parts (b) and (c) above, comment on each of your stock’s and portfolio’s performance, and on their risk characteristics, comparing and contrasting the magnitude and the proportions of their systematic and unsystematic risk components. What further insights can you gain on the characteristics and behaviour of your stocks and portfolio compared to the analysis and observations you made in Part 1 (c) and Part 2 (b)? (15 marks)

Part 4 (15 marks)

From the point of view of an investor who wishes to evaluate whether the stocks that you examined are worth investing in, how useful was the analysis you carried out on these stocks? What limitations do you see in your analysis and results for investment decision making purposes? What further analysis would you wish to carry out? Explain briefly.

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Examples of websites for sourcing data

Australian Stock Exchange:

http://www.asx.com.au/asx/statistics/indexInfo.jsp

BARRA indexes:

http://www.barra.com/research/download_returns.asp

Morgan Stanley Indexes:

http://www.msci.com

For individual stock data:

http://finance.yahoo.com/

Reserve Bank of Australia – for interest rates, exchange rates etc.

http://www.rba.gov.au/Statistics/

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