MANAGERIAL FINANCE PROJECT SIMULATION 2

Managerial Finance & Data Analysis

Your task: Select5-8 assets (e.g., stocks, ETFs, mutual funds, etc.) and answer the following questions:

(1) Identify and quantify the idiosyncratic and systematic sources of risk which impact their performance.Comment onhow the relationship between these sources of risk and performance vary across the business cycle (e.g., economic periods of expansion versus recessionary periods).

(2) Examine the correlation in performance between your selected assets. Comment on how this correlation varies across time (e.g., economic periods of expansion versus recessionary periods).

(3) Calculate risk-adjusted performance measures (e.g., Sharpe and Treynor ratios) and rank the performance of the assets. Answer the following questions: (a) What do the betas tell us? (b) Does this ranking change across the business cycle?

(4) According to classical finance theory, we are risk averse investors and demand higher rewards in order to take on more risk. Estimate the risk-return relation and discuss what you see with reference to our discussions about debt versus equity as well as investor psychology.(5)Interest rates are a fundamental measure of the cost of capital, and impact firms' cash flows and cost of debt. Examine how changes in interest rates impact the performance of your assets.Do you see any variation across time and across industries?*** End of Project Simulation 2 ***