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.