In this assignment you will look at asset return and risk, mean-variance optimisation and mispricing. This will be done using data in an Excel worksheet.
In this assignment you will look at asset return and risk, mean-variance optimisation and mispricing. This will be done using data in an Excel worksheet called AssignmentPart1Data_2021Autumn.xlsx.
Data Description
The Excel worksheet contains monthly closing prices from January 2011 to December 2020 for stocks in six (6) Australian companies, the ASX200 and the Reserve Bank of Australia’s (RBA) cash rate target.
Tasks:
1: The Impact of COVID and Selecting Companies to Invest
COVID19 has caused investors to change their attitudes to investing in equity. The majority of contributors to Roosters Superannuation Scheme are within the age group 25 years to 35 years. Roosters Superannuation Scheme asks you to write them a brief analysis on any changes that have occurred in this age group’s preferred investment mix, attitude to risk and investment priorities due to COVID19. As part of this analysis they would like you to also provide recommendations on the suitability of six (6) companies for investment. These recommendations need to include estimations of continuous return statistics and information about the operations of each of the companies and whether Roosters Superannuation Scheme should invest in shares in any of these companies.
2: Selecting the Optimal Portfolio
Roosters Superannuation Scheme decides to invest $2,500,000 in the two companies that are the most highly correlated. They do not want to use short -selling and have a risk aversion factor of 5. They ask you to (i) estimate the weights and amounts of the two companies if they only invest in a portfolio containing these two companies; (ii) estimate the weights and amounts they should invest in the optimal portfolio containing shares in these two companies and a risk free asset. The return and risk of the portfolios need to be provided. You need to also provide and explain a fully labelled mean-standard deviation diagram showing the positions of the optimal total portfolio, the optimum risky asset portfolio, the portfolio only containing the two companies, risk-free interest rate security, the efficient frontier and capital allocation line. The diagram can be hand drawn.
3: Asset Pricing Theory
Several asset pricing models estimate the expected return on an asset by taking into account its level of risk. Roosters Superannuation Scheme asks you to provide them with an explanation of how this can be done. Write up an explanation using the single index model (SIM) on the relationship between the expected return for each of the six (6) companies and risk. The SIM is summarised in the following equation.
