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financial statistics and returns

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solution


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CO-M015 Finance Autumn 2014;ECO-M015 Finance: Assessment II;This assessment counts for 20% of the overall module grade.;Instructions: Use the dataset provided to complete this assessment. The dataset shows daily close prices of eleven stocks (labelled 0-9 and A), and the FTSE 100 index during July, August and September 2014.;All students will be using the FTSE 100 and Stock A. In addition, each of you will use one of the other ten stocks, whose number corresponds to the last digit of your student ID number. We will refer to this in the text below as ?your stock?.;ANSWER BOTH PARTS.;PART A: Return statistics;Note all calculations should be carried out for the whole period.;1. Calculate the daily returns of the FTSE 100, stock A, and your stock. Present just your answers for September in a table. [5 marks];2. Calculate the average daily returns of the FTSE 100, stock A, and your stock. [6 marks] Comment on the ranking of these assets, try to relate these statistics to recent developments in the financial markets. [4 marks];3. Calculate the standard deviations of the FTSE 100, stock A, and your stock. [6 marks] Comment on the riskiness of these assets according to their volatilities, try to relate these statistics to recent developments in the financial markets. [4 marks];4. Calculate the correlation between stock A and the FTSE 100, and between your stock and the FTSE 100. [5 marks] Do you have any evidence to show that your stock ?moves with the market? more than stock A does? [5 marks];5. Calculate the betas of stock A and your stock. [5 marks] Interpret these numbers. [5 marks];Do these numbers make sense empirically? [5 marks];[In parts 2 & 3 you are asked to comment on recent developments in financial markets. We are looking for you to comment on some combination of the relevant performance of ?your stock?, ?stock A? and the FTSE 100. There may be something specific during the period that you might wish to comment upon. This could be to do with either the broader economy, or the specific industry the companies operate in, or perhaps even something specific to one of the companies.];1;ECO-M015 Finance Autumn 2014;PART B: Portfolio analysis;Let us consider a two-share portfolio which comprises stock A and your stock.;6. Write down the expression for the daily return of your portfolio (based on historical data), and its volatility. Describe your notation clearly. [4 marks] Explain why historical data might not be useful for the purposes of investing? Why is historical data still often used? [6 marks];7. Calculate the return, and standard deviation of the following portfolios.;(i) All stock A;(ii) All your stock;(iii) 25% stock A, 75% your stock (iv) 75% stock A, 25% your stock;(v) Equally weighted;Chart the risk/return profile using these portfolios, mark the corresponding number of each portfolio on your chart. [10 marks];8. Explain the term ?efficient frontier?. Hence or otherwise, identify which one(s) of the portfolios above are inefficient. Carefully justify your choice. [10 marks];9. Assume that the daily risk-free rate is negligible. Which of the above portfolios is optimal according to the Sharpe ratio? Explain your answer carefully. [10 marks];10. Which of the above portfolios would you recommend to an extremely risk-averse investor? Why? [10 marks];End of Assessment

 

Paper#17924 | Written in 18-Jul-2015

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