Question 1
You are a financial advisor and your new client is Triangle Jones, a 32 year old Musician. In the first meeting Triangle tells you he only has faith in real assets. He believes only real assets create wealth in an economy and when you try to explain the value of financial assets he argues that although financial assets may have some role, resources used for rearranging wealth (that is, bundling and unbundling financial assets) might be better spent on creating wealth (that is, creating real asset).
Evaluate Triangle's criticism with examples.
Question 2
You are considering investing in Australian shares and decide to investigate the shares of two Australian companies: AMP Ltd and Myer Holdings Limited.
(For this question please note:
- Use the Yahoo! Finance website at http://au.finance.yahoo.com/ for data.
- The monthly holding period return is the percentage return (%) you would receive if you bought an asset on the first day of the month (opening price) and sold it on the last day of the month (closing price). (Use 'Close' rather than 'Adjusted Close' for the selling price and ignore any dividends).
- This question is to be done on a spreadsheet with the results pasted and submitted in a Word document. Turnitin does not support spreadsheets. Make sure that you show all your workings - for example, do not simply put down the covariance but show how it was obtained and this does not mean giving the Excel algorithm. Please do not give cell formulae, cell references, etc, as the reader should be able to follow from a table. Also please note using excel formula such as =COVAR() is not acceptable.)
a) Find the monthly opening and closing prices for the period 1 Jan 2014 - 31 Dec 2014 for AMP Ltd (AMP.AX), and Myer Holdings Limited (MYR.AX). Using the monthly holding period returns (%) for the period 1 Jan 2014 - 31 Dec 2014 for both shares construct the minimum variance portfolio comprising of only AMP and MYR and calculate the risk and return of this minimum variance portfolio.
(Hint: to construct MVP you need standard deviations of both shares and covariance between the shares. To calculate return of MVP you need annual holding period returns of the shares.)
b) Plot the efficient frontier of this two security universe (AMP and MYR) on a graph, include all data in a separate table and explain this graph.
Question 3
On 13 November 2014 Westpac Banking Corporation's (WBC) CEO Gail Kelly announced her retirement. Her successor is Brian Hartzer who will be taking over from 1st February 2015.
Evaluate how this announcement supported (or not) the various types of Efficient Market Hypothesis.
Support your evaluation by analysing the share prices of WBC before, during and aftermath of this announcement. Also include the market reaction when Mr Hartzer takes over on 1/2/2015 (use the Yahoo! Finance website at http://au.finance.yahoo.com/ for data). (word limit 750 words)
Question 4
Evaluate using how credible are the following statements. Are you likely to earn an abnormal return by investing based on these statements?
a) The prospectus for the Ruthless Fund states that Ruthless Fund out-performed all other Australian funds last year.
b) Your friend says that she has a gift for picking stocks. Last year every stock she picked provided a return of over 30%. Your friend boasts that she reads the Wall Street Journal, Financial Times and the Financial Review every day.
c) Your colleague showed you an advertisement on a webpage for an investment seminar that guarantees you will double your money in the share market. The advertisement showcases an investor who turned $5,000 into $10,000 last month.
Question 5
You are a bond fund manager evaluating some bonds for your client Square Madison's portfolio. Madison is a Mathematics teacher and very keen on understanding reasons behind your investment decisions regarding her portfolio.
The three bonds you are evaluating are:
1. A 5-year $1000 face value zero coupon bond issued by ZYL Ltd. This bond is currently priced to yield 12% per annum.
2. A 5-year $1000 face value 12% coupon bond (with semi-annual interest payment) issued by MBD Corp Ltd. This bond is currently priced to yield 10% per annum.
3. A 10-year $1000 face value 6% coupon bond (with semi-annual interest payment) issued by Best Buy Co. This bond is currently priced to yield 9% per annum.
a) Calculate the duration of the bonds.
b) Calculate the modified duration of the bonds.
c) Your extensive research makes you believe the interest rates are on the rise. In this environment if you have to choose only one bond which one would you choose for Madison? Explain to her the reason behind your choice including why you calculated durations and modified durations of the bonds.
d) Madison has heard the word 'convexity'. Explain to her the effect of convexity on bond prices with formula and graph. (word limit 400 words)