Question 1
You are a financial analyst and you have noticed that clients are only interested to know what will be their return if they take your investment advice. When you bring this up in your company's weekly meeting one of your colleague responds by stating he does not believe that risk matters if it does not hurt the investor. He states that given that an investment made money, what difference does it make how the money was earned?
Evaluate this issue with examples learnt (or not) from the Global Financial Crisis.
(Word limit 750 words)
Question 2
You are considering investing in Australian shares and decide to investigate the shares of two Australian companies: Insurance Australia Group Ltd and Wesfarmers Ltd.
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 include any dividends paid).
• This question is to be done on a spreadsheet with the results pasted and submitted in a Word document. EASTS 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 and do not use any excel formula to calculate standard deviation, covariance etc. It will not be acceptable.
a) Find the monthly opening and closing prices for the period 1 July 2014 - 30 June 2015 for Insurance Australia Group Ltd (IAG.AX), and Wesfarmers Ltd (WES.AX). Using the monthly holding period returns (%) for the period 1 July 2014 - 30 June 2015 for both shares construct the minimum variance portfolio (MVP)comprising of only IAG and WES 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 (IAG and WES) on a graph, include all data in a separate table and explain this graph.
c) If you are an investor with risk aversion factor A = 3 based on the utility function which specific portfolio on the efficient frontier (that you calculated in part b) would you prefer most? Calculate using formula and explain why.
Question 3
On 17 June 2015 Woolworths (WOW) announced that Grant O'Brien will step down as CEO.
Evaluatehow this announcement supported (or not) the various types of Efficient Market Hypothesis. Support your evaluation by analysing the share prices of WOW before, during and aftermath of this announcement (use the Yahoo! Finance website at http://au.finance.yahoo.com/for data) and using an Event Study. (Word limit 750 words)