Question 1: Quantitative Research For your next assignment your boss has assigned you to the research department of A.P. Investments. The head of the research department has given you the following tasks. He has provided you with some monthly financial data on the stocks of Air New Zealand, Xero, the NZX 50 index and the risk-free rate and wants you to analyze this data. In particular, he wants an overview of the following characteristics for the two stocks.
a) Your boss first wants to know what the average returns and standard deviations per annum are for the two stocks. He then wants you to use regression analysis to assert the market risk of the two stocks and to give an interpretation of your findings. In addition, he wants you to discuss the alpha's of these stocks and their implications.
b) Assuming that the rate of return on risk-free asset is 2.5% per annum, your boss also wants you to draw a risk-return graph with beta on the x-axis and returns on the y-axis, which shows the Security Market Line, the market portfolio and the two stocks and discuss your findings. He further wants you to discuss the level of diversification of the two stocks and its implications.
c) Finally, he wants you to construct a portfolio that invests 50% in Air New Zealand and 50% in Xero, and estimate beta and expected return for this portfolio, comment on your findings, and compare the ones for the individual stocks?
|
Date
|
Air NZ
|
Xero
|
NZX50
|
90 DAY BANK BILL (RFR) - % p.a.
|
|
May-10
|
0.892
|
1.4
|
3061.23
|
2.76
|
|
Jun-10
|
0.816
|
1.4
|
2972.09
|
3.04
|
|
Jul-10
|
0.846
|
1.52
|
3034.62
|
3.23
|
|
Aug-10
|
0.976
|
1.47
|
3036.10
|
3.54
|
|
Sep-10
|
0.992
|
1.48
|
3178.09
|
3.48
|
|
Oct-10
|
1.054
|
1.68
|
3304.89
|
3.43
|
|
Nov-10
|
1.077
|
1.96
|
3264.50
|
3.51
|
|
Dec-10
|
1.171
|
3
|
3309.03
|
3.40
|
|
Jan-11
|
1.093
|
2.7
|
3338.74
|
3.41
|
|
Feb-11
|
1.038
|
2.62
|
3370.52
|
3.28
|
|
Mar-11
|
0.888
|
2.5
|
3439.85
|
2.77
|
|
Apr-11
|
0.888
|
2.55
|
3519.33
|
2.80
|
|
May-11
|
0.872
|
2.4
|
3547.64
|
2.83
|
|
Jun-11
|
0.896
|
2.16
|
3448.35
|
2.87
|
|
Jul-11
|
0.936
|
2.46
|
3395.63
|
3.05
|
|
Aug-11
|
0.888
|
2.74
|
3323.07
|
3.10
|
|
Sep-11
|
0.892
|
2.7
|
3343.35
|
3.01
|
|
Oct-11
|
0.859
|
2.9
|
3332.56
|
2.92
|
|
Nov-11
|
0.794
|
2.75
|
3270.21
|
2.71
|
|
Dec-11
|
0.737
|
2.76
|
3274.71
|
2.65
|
|
Jan-12
|
0.745
|
2.91
|
3296.20
|
2.71
|
|
Feb-12
|
0.708
|
3.11
|
3322.53
|
2.78
|
|
Mar-12
|
0.712
|
4.02
|
3509.55
|
2.83
|
|
Apr-12
|
0.745
|
4.04
|
3555.87
|
2.75
|
|
May-12
|
0.729
|
4.1
|
3488.29
|
2.43
|
|
Jun-12
|
0.72
|
5
|
3399.83
|
2.54
|
|
Jul-12
|
0.754
|
5.34
|
3545.01
|
2.59
|
|
Aug-12
|
0.913
|
4.79
|
3666.68
|
2.63
|
|
Sep-12
|
1.003
|
5.2
|
3834.15
|
2.57
|
|
Oct-12
|
1.072
|
5.45
|
3957.88
|
2.53
|
|
Nov-12
|
1.106
|
6.88
|
4050.09
|
2.54
|
|
Dec-12
|
1.119
|
7.6
|
4066.51
|
2.60
|
|
Jan-13
|
1.08
|
7.27
|
4199.82
|
2.68
|
|
Feb-13
|
1.21
|
7.65
|
4214.60
|
2.77
|
|
Mar-13
|
1.354
|
11.02
|
4422.75
|
2.73
|
|
Apr-13
|
1.323
|
14.9
|
4614.37
|
2.70
|
|
May-13
|
1.292
|
14
|
4511.35
|
2.70
|
|
Jun-13
|
1.31
|
16.15
|
4440.17
|
2.78
|
|
Jul-13
|
1.279
|
17.3
|
4537.98
|
2.84
|
|
Aug-13
|
1.253
|
16.8
|
4540.97
|
2.91
|
|
Sep-13
|
1.386
|
18.96
|
4782.68
|
2.94
|
|
Oct-13
|
1.473
|
28
|
4909.73
|
2.97
|
|
Nov-13
|
1.505
|
34.47
|
4794.95
|
3.06
|
|
Dec-13
|
1.5
|
32.3
|
4737.01
|
3.28
|
|
Jan-14
|
1.564
|
41.49
|
4874.58
|
3.41
|
|
Feb-14
|
1.624
|
40.15
|
4990.04
|
3.44
|
|
Mar-14
|
1.925
|
39.35
|
5139.98
|
3.54
|
|
Apr-14
|
1.977
|
31.65
|
5232.68
|
3.64
|
|
May-14
|
2.061
|
32
|
5178.44
|
3.65
|
|
Jun-14
|
1.958
|
25.99
|
5141.48
|
3.82
|
|
Jul-14
|
1.864
|
25.41
|
5167.99
|
3.91
|
|
Aug-14
|
2.066
|
25.2
|
5223.30
|
3.86
|
|
Sep-14
|
1.881
|
21.6
|
5255.04
|
3.84
|
|
Oct-14
|
1.949
|
15.85
|
5387.83
|
3.78
|
|
Nov-14
|
2.356
|
16.98
|
5424.45
|
3.75
|
|
Dec-14
|
2.395
|
16.15
|
5568.28
|
3.73
|
|
Jan-15
|
2.531
|
15.64
|
5744.00
|
3.68
|
|
Feb-15
|
2.763
|
24.7
|
5878.47
|
3.58
|
|
Mar-15
|
2.725
|
24.1
|
5833.99
|
3.57
|
|
Apr-15
|
2.7
|
19.9
|
5791.34
|
3.54
|
|
May-15
|
2.69
|
19.75
|
5797.40
|
3.40
|