2. Use the returns calculated in 1 to find the standard deviation of the returns for each asset over the 24 months period 31/1/12-31/12/13.

3. Use your findings in 1 and 2 to evaluate and discuss the return and risk associated with each asset. Which asset appears to be preferable? Explain.

4. Use the CAPM to find the required return for each asset. Compare this value with the average monthly returns calculated in 1

.5. Compare and contrast your findings in 3 and 4. What recommendations wouldyou provide to the manager with regard to investigating in any of the threeassets? Explain to the manager why s/he is better off using beta than thestandard deviation to assess the risk of each asset

6. b) As a result of favourable political events, investors suddenly become less risk-averse, causing the market return to drop by 1% to 9% p.a.

Assignment Business Finance 6392 Semester 1, 2016 Due date : Thursday, 21 April, 2016 by 5.00 pm Hard copy to Mail Box No. 348. Building 11 (Enquiry: Faculty of BGL Reception). Soft copy to: Assignment Drop Box on the unit's Moodle website. Assessment weighting : 20% of total assessment Questions: Part-P: (Total marks = 30) 'Standard deviation and beta are the appropriate measures of risk of investment'- Explain? Write an essay of 700 words on beta (of a company/ security) referring to at least 6 most recent journal articles. You may refer more than 6 journal articles as you may require, but 6 articles has to be published between 2012 to 2016, starting from the latest? Page 1 of 3 Part-Q: (Total marks = 70, 10 (Q1) + 60 (5X12) marks) Question: You, a financial analyst for an investment firm, must evaluate the risk and return of three assets given below. The firm is considering adding these assets to its diversified asset portfolio. To assess the return and risk of each asset, you gathered data on the monthly share price index of each asset over the immediately preceding 25 months, 31/12/11-31/12/13. These data are summarised in the following table. Your investigation suggests that the assets, on average, will tend to perform in the future just as they have during the past 24 months. You therefore believe that the expected monthly return can be estimated by finding the average monthly return for each asset over the past 24 months. Name Code 31/12/2011 31/01/2012 29/02/2012 30/03/2012 30/04/2012 31/05/2012 29/06/2012 31/07/2012 31/08/2012 28/09/2012 31/10/2012 30/11/2012 31/12/2012 31/01/2013 28/02/2013 29/03/2013 30/04/2013 31/05/2013 28/06/2013 31/07/2013 30/08/2013 30/09/2013 31/10/2013 29/11/2013 31/12/2013 CHINA TIANYI HOLDINGS - PRICE INDEX K:TIFR(PI) 192.9 245.7 255.7 207.1 210 188.6 164.3 168.6 158.6 152.9 160 154.3 162.9 161.4 152.9 145.7 142.9 141.4 194.3 217.1 182.9 175.7 177.1 174.3 165.7 UNIPRESIDENT CHINA HDG. PRICE INDEX K:UNIP(PI) 97.9 96.2 106.3 114.7 148.4 144 151.6 155.6 168.4 187.8 205.3 213.9 172.8 191.4 201.1 187.4 177.7 181.5 165.9 148.8 139.6 162.7 163.2 165.5 166.3 VITASOY INTL.HDG. - PRICE INDEX K:VITA(PI) 397.2 407.6 429.2 417.4 395.8 402.1 450.7 479.2 459.7 471.5 511.1 547.9 550 567.4 626.4 607.6 652.8 693.8 650.7 659.7 681.3 679.9 694.4 743.1 829.2 Page 2 of 3 You believe that each asset's risk can be assessed in two ways: in isolation and as part of the firm's diversified portfolio of assets. The risk of the assets in isolation can be found by using the standard deviation and coefficient of variation of returns over the past 24 months. The capital asset pricing model (CAPM) can be used to assess the asset's risk as part of the firm's portfolio of assets. Applying some sophisticated quantitative techniques, you estimated betas for the assets of 1.60 (TIFR), 1.10 (UNIP) and 1.12 (VITA), respectively. In addition, you found that the risk-free rate is currently 7% p.a. and the market return is 10% p.a. Required 1. Calculate the monthly rate of return for each asset in each of the 24 preceding months, and use those values to find the average monthly return for each asset over the 24 month period 2. Use the returns calculated in 1 to find the standard deviation of the returns for each asset over the 24 months period 31/1/12-31/12/13. 3. Use your findings in 1 and 2 to evaluate and discuss the return and risk associated with each asset. Which asset appears to be preferable? Explain. 4. Use the CAPM to find the required return for each asset. Compare this value with the average monthly returns calculated in 1. 5. Compare and contrast your findings in 3 and 4. What recommendations would you provide to the manager with regard to investigating in any of the three assets? Explain to the manager why s/he is better off using beta than the standard deviation to assess the risk of each asset. 6. Rework 4 and 5 under each of the following circumstances: a) A rise of 1% p.a. in inflationary expectations causes the risk-free rate to rise to 8% p.a. and the market return to rise to 11% p.a. b) As a result of favourable political events, investors suddenly become less risk-averse, causing the market return to drop by 1% to 9% p.a. (Show full workings) ______________________________________________________________ TOTAL ASSIGNMENT MARKS = 100 MARKS Page 3 of 3