Compute the standard deviation of the equally weighted

Assignment Help Accounting Basics
Reference no: EM132448591

Part 1: Average returns

Compute the monthly return on the shares of each company and the ASX200 index by using the following formula:

?Return?_t=

(P_t-P_(t-1))/P_(t-1) ×100,

  • where P_t is the share price (or the value of ASX200 index) in time period t. (Please note that you lose the first observation when calculating returns.)

(a) Using the monthly returns, calculate the average return on shares of each company from February 2015 - December 2017. Compare them with the average return on the ASX200 index.

(b) Suppose an investor created an equally weighted portfolio of these five companies (i.e. invested 20% of funds in each company). What would be the average return on the portfolio? Explain how you derived your answer.

Part 2: Volatility

(a) Calculate the standard deviation of returns for the five companies. What does the standard deviation tell us about the overall risk of these companies?

(b) Compute the standard deviation of the equally weighted portfolio of these five shares. How does it compare to the standard deviation of the individual companies? Provide a brief explanation.

(c) How does the standard deviation of returns of the ASX200 index compare with that of individual shares and the equally weighted portfolio? Provide a brief explanation.

Part 3: Beta's

(a) Based on the data provided find an estimate of beta for each company.

For this you will have to first calculate the covariance of a company's returns with the ASX200 index. Use the following formula in excel:

= covariance(Return of company X,Return of ASX200)

Beta's can then be calculated by

β_X=(Covariance(Return of Company X,Return of ASX200))/(Variance (return of ASX200)).

(b) Briefly explain why each company has high/low values of beta.

Part 4: Forecast & Investment strategy

The research department of Tri-Star Management has come up with the following forecast of the share prices and the ASX200 index for the month of June 2018:

 

  • They have also concluded that in 2018, the annual risk free rate is going to be steady at 1.5%.

(a) Based on the forecasts given above, write a short report for the clients of Tri-Star Management. Your report should be approximately 500 words long and contain: (i) an assessment of risk of each company, (ii) an evaluation whether a share is overpriced, underpriced or correctly priced and (iii) your recommendation regarding investment in these companies.

(b) Would you recommend the clients of Tri-Star Management to invest in an equally weighted portfolio of these five companies? Provide a brief explanation.

Reference no: EM132448591

Questions Cloud

Describe the use of internal rate of return : Describe the use of internal rate of return (IRR), net present value (NPV), and the payback method in evaluating project cash flows.
Analyze the implication of globalization on the negotiation : Analyze the implications of globalization and technology on the negotiation.discusses a negotiation situation that has occurred in a global context
Problem- Journalize Various Accounts Receivable Transactions : Problem - Journalize Various Accounts Receivable Transactions. Assuming that the books have not been closed for 2017, make the necessary correcting entries
Wireless application protocol : Produce a report on why sensitive information should not be sent over the Wireless Application Protocol.
Compute the standard deviation of the equally weighted : ow does it compare to the standard deviation of the individual companies? Provide a brief explanation.Calculate the standard deviation of returns
Web browser forensics : You completed a short APA research paper on an overview of a particular Web Browser, this week we are going to dig a little deeper.
Record the effects of transactions in the T accounts : The firm has the following transactions during the month of December 2019. Record the effects of these transactions in the T accounts
What is public-key certificate and chain of certificates : What are two different uses of public-key cryptography related to key distribution? What is a public-key certificate? What is a chain of certificates?
Explain Who would recommend Apple merge with : Apple has the cash on hand to basically merge with or purchase any company in the world. Who would you recommend Apple merge with?

Reviews

Write a Review

Accounting Basics Questions & Answers

  How much control does fed have over this longer real rate

Hubbard argues that the Fed can control the Fed funds rate, but the interest rate that is important for the economy is a longer-term real rate of interest.   How much control does the Fed have over this longer real rate?

  Coures:- fundamental accounting principles

Coures:- Fundamental Accounting Principles: - Explain the goals and uses of special journals.

  Accounting problems

Accounting problems,  Draw a detailed timeline incorporating the dividends, calculate    the exact Payback Period  b)   the discounted Payback Period. the IRR,  the NPV, the Profitability Index.

  Write a report on internal controls

Write a report on Internal Controls

  Prepare the bank reconciliation for company

Prepare the bank reconciliation for company.

  Cost-benefit analysis

Create a cost-benefit analysis to evaluate the project

  Theory of interest

Theory of Interest: NPV, IRR, Nominal and Real, Amortization, Sinking Fund, TWRR, DWRR

  Liquidity and profitability

Distinguish between liquidity and profitability.

  What is the expected risk premium on the portfolio

Your Corp, Inc. has a corporate tax rate of 35%. Please calculate their after tax cost of debt expressed as a percentage. Your Corp, Inc. has several outstanding bond issues all of which require semiannual interest payments.

  Simple interest and compound interest

Simple Interest, Compound interest, discount rate, force of interest, AV, PV

  Capm and venture capital

CAPM and Venture Capital

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd