Problem 1: Select a company from FTSE 100 and calculate its Weighted Average Cost of Capital. Demonstrate how the WACC changes with the level of indebtedness of the company. You are specifically required to:
a) Select and justify an appropriate data set representing historical levels of indebtedness and the corresponding WACC for the chosen company.
b) Conduct correlation analysis of the two variables (WACC and debt).
c) Interpret the results with reference to the traditional view on the WACC and theories such as Modigliani and Miller.
To do this you need to identify the companies on the index with the steepest slope using technical analysis.
After selecting the companies, you then must create two portfolios (one for each set of companies)
To create a portfolio, you need to use the formula = 0.2*(the return for Co 1, y1 + Co 2, yr 1 + Co 3, yr 1 + Co 4, yr 1 + Co 5, yr 1).
Problem 2: With regard to Efficient Market Hypothesis, test the stock market index data (allocated by your tutor) covering the most recent 2-year period for weak form efficiency using regression analysis and hypothesis testing. You are specifically required to:
a) Create an equally weighted portfolio (A) of 5 random companies from the index. Calculate monthly logarithmic returns for that portfolio.
b) Create an equally weighted portfolio (B) of 5 companies using technical analysis (i.e. for the first month of the 2-year period select 5 companies with the steepest positive slope of the regression line representing daily share price movements). For this you need to screen the entire index.
c) Correctly specify the hypothesis for testing weak form market efficiency.
d) Test the data representing logarithmic returns of the two portfolios for weak form efficiency by means of the one tail independent samples T-test selecting an appropriate level of significance.
e) Discuss your findings in terms of the results of the test.
Critically evaluate your findings in terms of contemporary empirical study findings on weak form market efficiency and Random Walk Theory.
Problem 3: Each student will be allocated with a specific stock and an equity index. For each asset, s/he is required to download 10-year annual adjusted closing prices from the Bloomberg Terminal starting from 30 September 2019 going back 10 years. Once the data are obtained, each student needs to perform the following steps:
Calculate the annual log returns, variances and standard deviations for the 10-year period and fill in the table below (you may wish to re-create the table in Excel if necessary).
Construct the portfolio's efficient frontier by filling the table below and plotting the graph (you may wish to recreate the table if necessary).
What does the efficient frontier graph tell you about the portfolio allocation of these two assets? As a risk-averse investor, which combination mix will he choose? Why?
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