Instructions 1. This is a group assignment. Each group will consist of three students and each group

| November 9, 2018

Curtin
Business School

Department
of Finance

FINANCE
(Portfolio Management) 301

Semester 1, 2014 – 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.

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 back on the
week start from May 26th in the lecture. Late assignments will
attract a penalty of 10% per day.
____________________________________________________________________

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.
__________________________________________________________________________________
Examples of websites for sourcing data

Australian Stock Exchange:
.asx.com.au/asx/statistics/indexInfo.jsp”>http://www.asx.com.au/asx/statistics/indexInfo.jsp
BARRA indexes:
.barra.com/research/download_returns.asp”>http://www.barra.com/research/download_returns.asp
Morgan Stanley Indexes:
.msci.com/”>http://www.msci.com
For individual stock data:
.yahoo.com/”>http://finance.yahoo.com/
Reserve Bank of Australia – for interest
rates, exchange rates etc.
.rba.gov.au/Statistics/”>http://www.rba.gov.au/Statistics/

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