Final assignment
Part A: Written report
Write a report which addresses all of the following questions (a to f). Where relevant, base your analysis on the data provided (see Appendix 1). Please make any assumptions clear if used to clarify any issues.
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 4.45%. 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 the ‘Bordered Covariance’ and ‘Correlation Matrices’. Discuss the implications of these five assets on efficient frontier and CAL.
c) Economic indicators are often used to predict the business cycle. Provide an outlook for the economy based on data showing that the index of consumer expectations has risen and the initial claims for unemployment insurance has fallen. Discuss the consequences of that from a portfolio management perspective, elaborating on the choice of assets from cyclical and defensive industries.
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. 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 platinum for delivery 10 days from 23 March is AUD$1,260.49 per ounce. Suppose that from 24 March 2017 to 6 April 2017 the platinum prices were as in Table 3. Assume one futures contract consists of 100 ounces of platinum. 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 short 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].
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 the Information ratio using data from Table 4. Assume the risk-free rate is 4.45%. Briefly discuss each of the four measures plus the Morningstar risk-adjusted return model.
Referencing
Reference lists for AIB assignments normally contain the following number of relevant references from different sources: 6–12 (for MBA assignments). All references must be from credible sources such as books, industry related journals, magazines, company documents and recent academic articles.
Marking
Your assignment will be marked per the criteria outlined in the assessment grading criteria (see Appendix 2). Your grade will be adversely affected if your assignment contains no/poor citations and/or reference list and if your assignment word length is beyond the allowed
tolerance level Please do not exceed maximum word limit of 2,420 even by one word as there is now a 25 percent penalty on the graded mark.
Important written report instructions
The required word length for this report is 2200 words (plus or minus 10%).
• Your report will be marked based on the criteria identified in the assessment grading scheme provided in Appendix 2.
• In terms of structure, presentation and style:
o given the length of this report, you are not required to follow the standard report format. Instead, follow the format identified within the ‘Assessment’ section of the subject website.
o use the-preferred Microsoft Word settings
o use author-date style referencing (which includes in-text citations and a reference list).
(The last two requirements are explained in the Style Guide.)
• Useful resources when working on your report include:
o Assignment Guide
o Online Library.
Appendix 1 Final assignment data tables (1–4)
Table 1: Asset returns on different asset classes over the period 1996 to 2016 Year Australian Shares (ASX 200; with dividends and splits) Australian Bonds (RBA cash rate) S&P500 (USD) US Fed Funds Rate (USD) Brent Oil (USD)
1996 9.9% 6.0% 22.96% 5.3% 31.8%
1997 8.4% 5.0% 33.36% 5.5% -28.2%
1998 5.9% 4.8% 28.58% 4.8% -44.1%
1999 14.7% 5.0% 21.04% 5.5% 172.6%
2000 2.8% 6.3% −9.10% 6.5% -15.2%
2001 6.6% 4.3% −11.89% 1.8% -15.7%
2002 -12.4% 4.8% −22.10% 1.3% 58.0%
2003 10.1% 5.3% 28.68% 1.0% 4.9%
2004 22.8% 5.3% 10.88% 2.3% 30.1%
2005 17.4% 5.5% 4.91% 4.3% 39.4%
2006 19.1% 6.3% 15.79% 5.3% 10.0%
2007 11.7% 6.8% 5.49% 4.3% 47.0%
2008 -42.0% 4.3% −37.00% 0.1% -56.6%
2009 32.0% 3.8% 26.46% 0.1% 81.9%
2010 -2.0% 4.8% 15.06% 0.1% 29.7%
2011 -14.5% 4.3% 2.11% 0.1% 17.2%
2012 14.6% 3.0% 16.00% 0.1% -0.1%
2013 14.9% 2.5% 32.39% 0.1% 2.8%
2014 1.1% 2.5% 13.69% 0.1% -47.5%
2015 -1.9% 2.0% 1.38% 0.4% -37.6%
2016 7.0% 1.5% 11.96% 0.6% 46.7%
Table 2: Option information
Stock price, S0 48
Exercise price, X 42
Interest rate, r 0.035 (3.5% per year)
Time to expiration, T 0.5 (6 months or half a year)
Standard deviation, σ 0.18 (18% per year)
Table 3: Platinum prices in Australian Dollars per ounce
Days and Futures Price (AUD per ounce)
23 March 2017 1,260.49
24 March 2017 1,264.04
27 March 2017 1,270.76
28 March 2017 1,246.93
29 March 2017 1,242.71
30 March 2017 1,240.24
31 March 2017 1,245.34
3 April 2017 1,257.61
4 April 2017 1,269.01
5 April 2017 1,268.83
6 April 2017 (delivery) 1,270.20
Table 4: Portfolio Fund portfolio
Performance data
Market
Average return, x̄ 18% 11%
Beta, β 1.18 1.0
Standard deviation, σ 26% 17%
Tracking error (nonsystematic risk), σ(e) 11% 0
Part A: Written report
Write a report which addresses all of the following questions (a to f). Where relevant, base your analysis on the data provided (see Appendix 1). Please make any assumptions clear if used to clarify any issues.
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 4.45%. 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 the ‘Bordered Covariance’ and ‘Correlation Matrices’. Discuss the implications of these five assets on efficient frontier and CAL.
c) Economic indicators are often used to predict the business cycle. Provide an outlook for the economy based on data showing that the index of consumer expectations has risen and the initial claims for unemployment insurance has fallen. Discuss the consequences of that from a portfolio management perspective, elaborating on the choice of assets from cyclical and defensive industries.
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. 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 platinum for delivery 10 days from 23 March is AUD$1,260.49 per ounce. Suppose that from 24 March 2017 to 6 April 2017 the platinum prices were as in Table 3. Assume one futures contract consists of 100 ounces of platinum. 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 short 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].
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 the Information ratio using data from Table 4. Assume the risk-free rate is 4.45%. Briefly discuss each of the four measures plus the Morningstar risk-adjusted return model.
Referencing
Reference lists for AIB assignments normally contain the following number of relevant references from different sources: 6–12 (for MBA assignments). All references must be from credible sources such as books, industry related journals, magazines, company documents and recent academic articles.
Marking
Your assignment will be marked per the criteria outlined in the assessment grading criteria (see Appendix 2). Your grade will be adversely affected if your assignment contains no/poor citations and/or reference list and if your assignment word length is beyond the allowed
tolerance level Please do not exceed maximum word limit of 2,420 even by one word as there is now a 25 percent penalty on the graded mark.
Important written report instructions
The required word length for this report is 2200 words (plus or minus 10%).
• Your report will be marked based on the criteria identified in the assessment grading scheme provided in Appendix 2.
• In terms of structure, presentation and style:
o given the length of this report, you are not required to follow the standard report format. Instead, follow the format identified within the ‘Assessment’ section of the subject website.
o use the-preferred Microsoft Word settings
o use author-date style referencing (which includes in-text citations and a reference list).
(The last two requirements are explained in the Style Guide.)
• Useful resources when working on your report include:
o Assignment Guide
o Online Library.
Appendix 1 Final assignment data tables (1–4)
Table 1: Asset returns on different asset classes over the period 1996 to 2016 Year Australian Shares (ASX 200; with dividends and splits) Australian Bonds (RBA cash rate) S&P500 (USD) US Fed Funds Rate (USD) Brent Oil (USD)
1996 9.9% 6.0% 22.96% 5.3% 31.8%
1997 8.4% 5.0% 33.36% 5.5% -28.2%
1998 5.9% 4.8% 28.58% 4.8% -44.1%
1999 14.7% 5.0% 21.04% 5.5% 172.6%
2000 2.8% 6.3% −9.10% 6.5% -15.2%
2001 6.6% 4.3% −11.89% 1.8% -15.7%
2002 -12.4% 4.8% −22.10% 1.3% 58.0%
2003 10.1% 5.3% 28.68% 1.0% 4.9%
2004 22.8% 5.3% 10.88% 2.3% 30.1%
2005 17.4% 5.5% 4.91% 4.3% 39.4%
2006 19.1% 6.3% 15.79% 5.3% 10.0%
2007 11.7% 6.8% 5.49% 4.3% 47.0%
2008 -42.0% 4.3% −37.00% 0.1% -56.6%
2009 32.0% 3.8% 26.46% 0.1% 81.9%
2010 -2.0% 4.8% 15.06% 0.1% 29.7%
2011 -14.5% 4.3% 2.11% 0.1% 17.2%
2012 14.6% 3.0% 16.00% 0.1% -0.1%
2013 14.9% 2.5% 32.39% 0.1% 2.8%
2014 1.1% 2.5% 13.69% 0.1% -47.5%
2015 -1.9% 2.0% 1.38% 0.4% -37.6%
2016 7.0% 1.5% 11.96% 0.6% 46.7%
Table 2: Option information
Stock price, S0 48
Exercise price, X 42
Interest rate, r 0.035 (3.5% per year)
Time to expiration, T 0.5 (6 months or half a year)
Standard deviation, σ 0.18 (18% per year)
Table 3: Platinum prices in Australian Dollars per ounce
Days and Futures Price (AUD per ounce)
23 March 2017 1,260.49
24 March 2017 1,264.04
27 March 2017 1,270.76
28 March 2017 1,246.93
29 March 2017 1,242.71
30 March 2017 1,240.24
31 March 2017 1,245.34
3 April 2017 1,257.61
4 April 2017 1,269.01
5 April 2017 1,268.83
6 April 2017 (delivery) 1,270.20
Table 4: Portfolio Fund portfolio
Performance data
Market
Average return, x̄ 18% 11%
Beta, β 1.18 1.0
Standard deviation, σ 26% 17%
Tracking error (nonsystematic risk), σ(e) 11% 0
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