1. Conduct some market research to find out what has been happening to your stock for the last 5 years. Based on what we learnt, there must be two primary sources which cause the prices of your stock to plunge (i.e. decline) at certain times; Unsystematic risk and Systematic risk. Highlight two specific down periods where one is caused by unsystematic risk and the other by systematic risk.

• For each, discuss the real-event in detail and how it affected the company performance on the day (or over the days) by referring to price changes (You can have a look at daily price changes in Yahoo by following 1.e. in Part I and changing the option to 'Daily'). Clearly discuss through what channels company performance would have been affected.
• For each, discuss how S&P/ASX200 responded on the same day (or over the days) by referring to value changes.
• Discuss your findings with reference to the impact of unsystematic and systematic risks.
• If your answer contains plagiarised materials, no marks will be given.

1. Discuss how strongly (or weakly) your stock is correlated with the market index, S&P/ASX200 by referring to an appropriate measure in Part I.
2. Discuss which asset, your stock or the market index (S&P/ASX200), is more sensitive to the changes in economic conditions by referring to an appropriate measure in Part I.
3. What is the standard deviation of your stock and the standard deviation of the market index? What is the standard deviation of a portfolio composed of 60% your stock and 40% the market index? Compare standard deviations and show that you were able to achieve diversification benefits by combining two assets.
4. Suppose that you consider forming a two-asset portfolio by investing 60% of your wealth in your first stock and 40% in the market index.

5.1. Compute the beta of your portfolio.

5.2 Compute the required return of your portfolio. Use 6.5% as a market risk premium and the 10-year government bond rate on 31 July 2020 as a risk-free rate. The 10-year government bond rates can be obtained from http://www.rba.gov.au/statistics/tables/index.html#interest-rates. See "Capital market yields - Government bonds-daily" under Interest Rates. The units of rates shown are per cent (%) per annum.

5.3 Compute the expected return of your portfolio using the annual average return. (Note:

Calculate the annual average return of an individual asset using the formula given in Q2, Part I. Each interval is to be July in Year t to July in Year t+1.)

5.4 Is your portfolio overpriced or underpriced and why? Consequently, which recommendation would you make, "Buy/Hold" or "Sell/don't buy"? [9 marks] Please show all your relevant calculations and justify your decision using the Security

Market Line. Label X-axis, Y-axis and intercept. Clearly present values on X- and Y- axis when you locate your portfolio in the graph.

1. Looking at the average monthly return and standard deviation ofS&P/ASX200, can you be 95% confident that this market portfolio will not lose more than 10% of its value in August 2020?
2. In this assignment, you have learnt how to estimate rE. Thoroughly describe how you did it and comment on the importance of rE.