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ECO-M015 Finance: Assessment II

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Question;ECO-M015 Finance Autumn 2014;1;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.]ECO-M015 Finance Autumn 2014;2;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

 

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