o Write a report which addresses the questions (a to f) below. Where relevant, base your analysis on the data provided.
Table 1: Asset returns on different asset classes over the period 1990 to 2010
|
Year
|
Australian Shares % return (ex dividends)
|
Australian Bonds % return
|
International Shares % return
|
Brent oil (USD) per barrel % return
|
Gold (USD) Troy ounce % return
|
|
1990
|
-20.1%
|
12.1%
|
-18.7%
|
34.7%
|
-3.1%
|
|
1991
|
22.2%
|
9.4%
|
16.0%
|
-37.4%
|
-8.6%
|
|
1992
|
-6.0%
|
8.9%
|
-7.1%
|
0.6%
|
-5.7%
|
|
1993
|
39.1%
|
6.7%
|
20.4%
|
-26.2%
|
17.7%
|
|
1994
|
-9.2%
|
10.0%
|
3.4%
|
23.1%
|
-2.2%
|
|
1995
|
16.5%
|
8.2%
|
18.7%
|
14.9%
|
1.0%
|
|
1996
|
7.2%
|
7.4%
|
11.7%
|
28.2%
|
-4.6%
|
|
1997
|
7.9%
|
6.1%
|
14.2%
|
-33.6%
|
-21.4%
|
|
1998
|
7.7%
|
5.0%
|
22.8%
|
-33.5%
|
-0.8%
|
|
1999
|
13.5%
|
7.0%
|
23.6%
|
136.5%
|
0.9%
|
|
2000
|
2.9%
|
5.5%
|
-14.1%
|
-9.4%
|
-5.4%
|
|
2001
|
2.6%
|
6.0%
|
-17.8%
|
-14.3%
|
0.7%
|
|
2002
|
-9.6%
|
5.2%
|
-21.1%
|
55.7%
|
25.6%
|
|
2003
|
8.7%
|
5.6%
|
30.8%
|
0.6%
|
19.9%
|
|
2004
|
22.8%
|
5.3%
|
12.8%
|
33.3%
|
4.6%
|
|
2005
|
15.7%
|
5.2%
|
7.6%
|
44.5%
|
17.8%
|
|
2006
|
19.8%
|
5.9%
|
18.0%
|
1.1%
|
23.2%
|
|
2007
|
17.9%
|
6.3%
|
7.1%
|
58.9%
|
31.9%
|
|
2008
|
-45.8%
|
4.0%
|
-42.1%
|
-61.8%
|
4.3%
|
|
2009
|
34.1%
|
5.7%
|
27.0%
|
117.5%
|
25.0%
|
|
2010
|
2.2%
|
5.5%
|
9.6%
|
19.7%
|
29.2%
|
Source: Brailsford et al. 2012; RBA 2016; MSCI World index 2016; gold USD per Troy ounce https://www.gold.org/research/download-the-gold-price-since-1978 (viewed on 11/11/2016);
Europe Brent spot price FOB in dollars per barrel https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=rbrte&f=D (viewed on 23/11/2016).
a) Briefly discuss the five asset classes in Table 1. Using the data from Table 1, calculate the Arithmetic Mean (AM), Geometric Mean (GM) and Standard Deviation (σ) of returns of each of the five asset classes. Briefly discuss the risk-return characteristics of each asset class with reference to these measures.
b) Construct an efficient portfolio. Assume the risk free rate over the period is 6.4%. Calculate the Efficient Frontier and Capital Allocation Line (CAL) for the five asset classes using the Excel Solver Tool (see prescribed Textbook Chapter 7, Appendix A for guidance). You will also need to calculate and provide ‘Bordered Covariance' and ‘Correlation Matrices'. Discuss the implications of these five assets on efficient frontier and CAL.
c) Briefly explain how fiscal and monetary policy can influence an economy. Discuss the three main factors that determine how sensitive a firm's earnings are to the business cycle.
d) Using the Black-Scholes formula and the cumulative normal distribution (i.e. see Table 21.2, p. 740 of the prescribed textbook), compute the call and put option prices using the data from Table 2.
Table 2: Option information
|
Stock price, S0
|
38
|
|
Exercise price, X
|
34
|
|
Interest rate, r
|
0.051 (5.1% per year)
|
|
Time to expiration, T
|
0.5 (6 months or half a year)
|
|
Standard deviation, σ
|
0.25 ( 25% per year)
|
First compute d1 and d2, then using Table 21.2 in the textbook, find the N(d)'s and use interpolation if needed to find the exact call and put prices.
e) Assume the current futures price for gold for delivery 10 days from 8 February is US$1,259.50 per ounce. Suppose that from 9 February 2017 to 22 February 2017 the gold prices were as in Table 3. Assume one futures contract consists of 100 ounces of gold. Also, assume the maintenance margin is 5% and the initial margin is 10%. Calculate the daily mark-to-market settlements for each contract held by the long position. Briefly discuss basis risk (i.e. you can give an example if it makes it easier to discuss) [Hint: see Chapter 22 and examples 22.1 and 22.2 of the textbook].
Table 3: Gold prices in US Dollars per ounce
|
Day
|
Futures Price (US Dollar per ounce)
|
|
8 Feb 2017
|
1,259.50
|
|
9 Feb 2017
|
1,253.50
|
|
10 Feb 2017
|
1,256.50
|
|
11 Feb 2017
|
1,261.10
|
|
12 Feb 2017
|
1,251.80
|
|
15 Feb 2017
|
1,254.80
|
|
16 Feb 2017
|
1,258.20
|
|
17 Feb 2017
|
1,269.10
|
|
18 Feb 2017
|
1,271.70
|
|
19 Feb 2017
|
1,266.10
|
|
22 Feb 2017 (delivery)
|
1,265.60
|
f) Evaluate a fund's portfolio performance in terms of the market (e.g. outperformance or underperformance) using the Sharpe ratio, Treynor measure, Jensen's alpha, and Information ratio using data from Table 4. Assume the risk-free rate is 5.3%. Briefly discuss each of the four measures plus the Morningstar risk-adjusted return model.
Table 4: Portfolio performance data
|
Fund Portfolio
|
Market
|
|
Average return, x¯
|
11%
|
8%
|
|
Beta, β
|
1.10
|
1.0
|
|
Standard deviation, σ
|
31%
|
25%
|
|
Tracking error (nonsystematic risk), σ(e)
|
13%
|
0
|
This assessment is an individual assessment (ie this is not a group assessment). Please ensure you avoid collusion and other practices which compromise individual assessment work.
Bodie Z, Kane A& Marcus AJ 2014, Investments, 10th edn, McGraw-Hill Education. (ISBN: 9780077861674) - Prescribed Textbook
The required word length for this assignment is atleast 2500 - 3000 words (excluding your cover page, executive summary, table of contents, list of references or appendices) with atleast 12 referencesdating 2011 - 2016, older than that would not do. All references must be from credible sources such as books, industry related journals, magazines, company documents and recent academic articles.
Also, In terms of structure, presentation and style we are normally required to use Microsoft Word settings (12 point Calibri; line spacing of 1.5 lines; language set as English(Australian); default Microsoft Word margin settings(usually 2.54cm top/bottom and 2.54 cm left/right) and Harvard style referencing (which includes in-text citations plus a reference list).
The assignment needs to be done properly with Cover Page, Executive Summary, TOC, Introduction, Discussion, Conclusion, Recommendations, References, etc.
The grade will be adversely affected if the assignment contains no/poor citations and/or reference list.