ASSIGNMENT 02

You have been given information about the performance of two securities, a Stock and a Bond, over the past six years in the table below. Based on this information, you have been requested to undertake a performance analysis with a view to forming a two-security portfolio.

Year	Stock		Bond
	Price	Dividend	Price	Coupon
2012	60.94	0.72	830	100
2013	43.84	0.80	847	100
2014	41.64	1.00	865	100
2015	48.25	1.24	870	100
2016	45.27	1.52	898	100
2017	57.00	1.64	915	100

Assume that the performance of the securities largely follow the performance of the economy. For the year 2018, three scenarios of economic performance are expected: Recession at 30%; Normal growth at 40%; and a Boom at 30%. The Stocks average return is expected to remain the same under a Normal growth scenario while it may drop by 14% under a Recession or increase by a 10% under a Boom. That of the Bond is equally expected to remain the same under a Normal growth scenario but may increase by 10% under a recession or decrease by 17% under a Boom.

Required:

Compute the compound annual return and return volatility for each security over the period.

[4 Marks]

What is the expected risk/ return profile of each security for the year 2018?

[5 Marks]

Assuming investment proportions for the Stock of 0% to 100%, in increments of 20%, derive the feasible set of portfolios of the two securities.

[10 Marks]

What is the risk/ return profile of the Minimum Variance Portfolio (MVP)?

[1 Marks]

Which portfolio are you recommending for the investment and why?

[5 Marks]

[Total: 25 Marks]