Reference no: EM133145081

AFIN 2050 Investments - Macquarie University

Analysis Report:

Question 1. Identify 3-4 stocks that experienced a significant loss and then recovered well from the first outbreak of COVID-19 pandemic in early 2020, as well as 3-4 stocks that not recovered well from the pandemic impact. All the stocks must be Australian listed stocks (traded on the Australian Securities Exchange). Provide a brief explanation of why the selected stocks performed the way they did.

Question 2. For the horizon from 24/02/2020 to 04/09/2020 (inclusive), download daily historical price data for the selected stocks and the ASX200 index (code = ^AXJO) from Yahoo Finance (use the ‘adjusted close' price). Calculate the betas and standard deviations of the daily returns for the selected stocks (use the ASX200 as the market proxy and a constant daily risk-free rate of 0.002%; present values in a table) and use 2-3 sentences to briefly explain the process of finding out betas.

-In your word file, present beta values and standard deviations in a table (5 marks), the equation or model used for calculation, briefly explain the process (3).

Question 3. Use CAPM to forecast the average daily expected returns for all selected shares. Assume an expected daily market return of 0.04% and a daily risk free rate of 0.002%, and calculate the expected daily returns on your stocks given your constructed betas. Based on the expected returns calculated, answer the following questions: a. which stock has highest/lowest expected return and explain this by the risk measures calculated in Q2; b. for the stock with highest expected and the stock lowest expected return, identify one business/financial risk (e.g., financial leverage, sensitivity of sales) for each stock that contributes to the amount the systematic risk involved.

Question 4. Using the expected returns calculated in Q3, and weights which vary from 0 to 100% in 5% increments, construct and graph three investment opportunity sets from the following sets of securities:
a. Two stocks from the ‘recovered well' category
b. Two stocks from the ‘recovered poorly' category
c. One stock from each of the ‘recovered well' and ‘recovered poorly' category

Please plot out the three investment opportunity sets in one graph set in expected return-standard deviation plane and identify the efficient frontiers. You need provide a short explanation for how the efficient frontier is identified.

Question 5. Find the optimum portfolio from each investment opportunity set (using the formula provided in the lecture slide/textbook). Which optimuml portfolio generates the best risk/return tradeoff (i.e. find the optimum portfolio for each a, b, and c and compare)? Why do you think this is the case?

Analysis Report

Allocate one of your 3-4 stocks in each category to each group member such that each group member has one unique stock from both "recovered well" category and one from the recovered poorly" category. Two members of the group should not analyze the same stock. For example, if you have well recovered stocks A, B, C, D and poorly recovered tocks W, X, Y, Z, group member 1 could take stocks A&W, member 2 B&X, member 3 C&Y and member 4 D&Z. Any pair of stocks allocated to each group member should not be identical to the pair C of stocks used in Q4 of the group report. Answer the following questions on your own:

Question 1. Follow the same approach and use the same dataset applied in your group report, construct the investment opportunity set for the two selected stocks. Identify the optimum risky portfolio (X). Compared with the best optimum risky portfolio (Y) identified in Q5 of Group Report, which portfolio offers better risk/return tradeoff, portfolio X or portfolio Y? Explain why.

-In your word file, present a graph with one investment opportunity set (1 marks); present the weights, expected return and standard deviation of optimum risky portfolio (no details of working steps needed) (2 marks); Explain.

Question 2. Combine the optimum risky portfolio X with one additional stock Z (at your own choice) to achieve more diversification benefits. It can be any stock that is traded in the market except for those used in the group report. Explain why this stock is selected. Draw a new investment opportunity set by varying weights in X and Z from 0 to 100% in 5% increments. What is the best Sharpe Ratio that can be achieved on this investment opportunity set? How does it compare with the Sharpe Ratio of portfolio X? Explain whether and why adding the stock you have selected is a good investment decision.

-In your word file, use 1-2 sentences to explain which stock is added; present this investment opportunity set separately or combine it with Q1; present the weights, expected return and standard deviation of the new optimum risky portfolio, as well as Sharpe ratio (no details of working steps needed); Explain.

Question 3. Assume a client of yours had a bullet loan (inclusive of the principal and interest) due 1 year from 04/09/2020. In order to meet the liability, she wanted to invested in a combination of a risk free and risky assets, and let it accumulate until the loan maturity. She informed you she would like the daily standard deviation of returns of her portfolio not to exceed 2%. What is the best investment strategy that could be taken assuming the three stocks you have picked (two from the group report, one from your own choice) are the only risky assets that can be invested.

Question 4. Compare the optimum risky portfolio identified in Q2 with the ASX200 index by using appropriate performance measures. What would be your recommendation to your client in Q3 if an index fund can be invested to track the performance of ASX200?

Question 5. For the period between 5/9/2020 and 5/9/2021 (inclusive), use the price data from Yahoo Finance (use the ‘adjusted close' price). Calculate the holding period return (HPR) for your selected two stocks from group report. Compare the actual holding period returns with the forecasted expected returns calculated based CAPM (daily return needs to be annualized to compare with annual HPR). Is the actually HPR lower or higher than CAPM forecasted return? What could be the reasons? Please provide at least 2 reasons.

Attachment:- Investments.rar