According to Roger Ibbotson, a professor in the Practice of Management at the Yale School of Management, the financial markets are the most carefully documented human phenomena in history. Over 2,000 NYSE stocks are traded and at least 6,000 more stocks are traded on other exchanges daily. Bonds, commodities, futures and options also provide a wealth of data. In the U.S. these data will be presented in The Wall Street Journal (and other newspapers), as well as on numerous financial Web sites.

In addition, the Japanese stock market trades over a billion shares a day, and the London Stock exchange reports trade on over 10,000 domestic and foreign issues within a day. The data generated by these transactions are quantifiable, quickly analysed and disseminated, and made easily accessible by computer. Thus, finance has increasingly come to resemble one of the exact sciences. The use of financial market data ranges from the simple S&P 500 to measure the performance of a portfolio, to a complex financial performance data. As an example, few decades ago, the bond market was the most stable portfolio performanceon Wall Street. Nowadays, it attracts groups of traders seeking to exploit this opportunities on small temporary mispricing using computers to analyse real-time data.

Financial market data is the foundation for the extensive empirical understanding we are currently having in the financial markets. The following are some of the principal findings on the research conducted by our scholars:

• Risky securities such as stocks, have higher average returns than riskless securities such as the Treasury bills.
• Stocks of small companies have higher average returns than larger companies.
• Long term bonds have higher average yields and returns than short-term bonds.
• The cost of capital for a company, project, or division can be predicted using data from the markets.

Due to the financial markets being well informed, finance is the most readily quantifiable branch of economics. Researchers are able to do more widespread empirical research than in any other economic field which can be promptly transformed into action in the marketplace.

Fig.1

YEAR

LARGE CO STOCK

LONG TERM GOVT BOND

US TREASURY BILLS

CONSUMER PRICE INDEX

1926

13.75%

5.69%

3.30%

-1.12%

1927

35.70%

6.58%

3.15%

-2.26%

1928

45.08%

1.15%

4.05%

-1.16%

1929

-8.80%

4.39%

4.47%

58.00%

1930

-25.13%

4.47%

2.27%

-6.40%

1931

-43.60%

-2.15%

1.15%

-9.32%

1932

-8.75%

8.51%

0.88%

-10.27%

1933

52.95%

1.92%

0.52%

0.76%

1934

-2.31%

7.59%

0.27%

1.52%

1935

46.79%

4.20%

0.17%

2.99%

1936

32.49%

5.13%

0.17%

1.45%

1937

35.45%

1.44%

0.27%

2.86%

1938

31.63%

4.21%

0.06%

-2.78%

1939

-1.43%

3.84%

0.04%

0.00%

1940

-10.36%

5.70%

0.04%

0.71%

1941

-12.02%

0.47%

0.14%

9.93%

1942

20.75%

1.80%

0.34%

9.03%

1943

25.38%

2.01%

0.38%

2.96%

1944

19.49%

2.27%

0.38%

2.30%

1945

36.21%

5.29%

0.38%

2.25%

1946

-8.42%

0.54%

0.38%

18.13%

1947

5.05%

-1.02%

0.62%

8.84%

1948

4.99%

2.66%

1.06%

2.99%

1949

17.81%

4.58%

1.12%

-2.07%

1950

30.05%

-0.98%

1.22%

5.93%

1951

23.79%

-0.20%

1.56%

6.00%

1952

18.39%

2.43%

1.75%

0.75%

1953

-1.07%

2.28%

1.87%

0.75%

1954

52.23%

3.08%

0.93%

-0.74%

1955

31.62%

-0.73%

1.80%

0.37%

1956

6.91%

-1.72%

2.66%

2.99%

1957

-10.50%

6.82%

3.28%

2.90%

1958

43.57%

-1.72%

1.71%

1.76%

1959

12.01%

-2.02%

3.48%

1.73%

1960

0.47%

11.21%

2.81%

1.36%

1961

26.84%

2.20%

2.40%

0.67%

1962

-8.75%

5.72%

2.82%

1.33%

1963

22.70%

1.79%

3.23%

1.64%

1964

16.43%

3.71%

3.62%

0.97%

1965

12.38%

0.93%

4.06%

1.92%

1966

-10.06%

5.12%

4.94%

3.46%

1967

23.98%

-2.86%

4.39%

3.04%

1968

11.03%

2.25%

5.49%

4.72%

1969

-8.43%

-5.63%

6.90%

6.20%

1970

3.94%

18.92%

6.50%

5.57%

1971

14.30%

11.24%

4.36%

3.27%

1972

18.99%

2.39%

4.23%

3.41%

1973

-14.69%

3.30%

7.29%

8.71%

1974

-26.47%

4.00%

7.99%

12.34%

1975

37.23%

5.52%

5.87%

6.94%

1976

23.93%

15.56%

5.07%

4.86%

1977

-7.16%

0.38%

5.45%

6.70%

1978

6.57%

-1.26%

7.64%

9.02%

1979

18.61%

-2.76%

10.56%

13.29%

1980

32.50%

-2.48%

12.10%

12.52%

1981

-4.92%

4.04%

14.60%

8.92%

1982

21.55%

44.28%

10.94%

3.83%

1983

22.56%

1.29%

8.99%

3.79%

1984

6.27%

15.29%

9.90%

3.95%

1985

31.73%

32.27%

7.71%

3.80%

1986

18.67%

22.39%

6.09%

1.10%

1987

5.25%

-3.03%

5.88%

4.43%

1988

16.61%

6.84%

6.94%

4.42%

1989

31.69%

18.54%

8.44%

4.65%

1990

-3.10%

7.74%

7.69%

6.11%

1991

30.46%

19.36%

5.43%

3.06%

1992

7.62%

7.34%

3.48%

2.90%

1993

10.08%

13.06%

3.03%

2.75%

1994

1.32%

-7.23%

4.39%

2.67%

1995

37.58%

25.94%

5.61%

2.54%

1996

22.96%

0.13%

5.14%

3.32%

1997

33.36%

12.02%

5.19%

1.70%

1998

28.58%

14.45%

4.86%

1.61%

1999

21.04%

-7.51%

4.80%

2.68%

2000

-9.10%

17.22%

5.98%

3.39%

2001

-11.89%

5.51%

3.33%

1.55%

2002

-22.10%

15.15%

1.61%

2.38%

2003

28.89%

2.01%

0.94%

1.88%

2004

10.88%

8.12%

1.14%

3.26%

2005

4.91%

6.89%

2.79%

3.42%

2006

15.79%

0.28%

4.97%

2.54%

2007

5.49%

10.85%

4.52%

4.08%

2008

-37.00%

41.78%

1.24%

0.09%

2009

26.46%

-25.61%

15.00%

2.72%

2010

15.06%

7.73%

0.14%

1.50%

2011

2.11%

35.75%

0.06%

2.96%

2012

16.00%

1.80%

0.08%

1.74%

2013

32.39%

-14.69%

0.05%

1.50%

Required:

1.Based on the above statement, discuss finance function in the financial market.

2.Calculate the total returnon the investmentand the variance of the expected return. (Feel free to utilize data from 1926 to 2013 in Figure 1 to illustrate your example).

3.Explain the relationship between diversification and standard deviation.

4.Explain the meaning of the Capital Asset Pricing Model (CAPM).

5.Examine the potential risks from capital markets with an appropriate illustration - demonstrating that you fully understand company valuations under risks and returns.

6.Evaluate the role of diversification in financial markets.

Note:Research - the breath of additional research undertaken to support your argument in this assignment i.e. we are looking to see how well you can provide us with evidence based discussion rather than simply giving us your own opinions.

1. For the reference page, please separate the resources according to group of sources such as Website References, Book References, and References.we expect you to use Harvard referencing and to demonstrate that you have undertaken research to support your writing of this report - thus we expect to find references that have not come directly from our teaching this semester.We will only give marks for references which are both correct at the end of your assignment but also used correctly within your written text.Any evidence of misuse of other people's work will impact the final score under this section but also the final score under each of the remaining sections.
2. Do a word count and indicate the number of wordsat the end of each page.Maximum word count allowed is 3000 words. The words range for each section is stated in theStandard Assessment & Grading Criteria for HBS Coursework.