Need Urgent Help with Question 3 and Question 9 of the attached document - Question 3 needs only ~400 words (also attaching an article which might be needed to answer question-3)

My word count for this assignment is: [Enter your word count] words Checklist I have completed my assignment using Word and Excel. I have completed my assignment using Calibri, Arial, Times New Roman or Verdana fonts. I have added my Personal ID on this page. I have added my word count on this page. I have added my Personal ID in front of the filename in the footer on the second page. I have saved the file to be uploaded as Each question of my assignment is within the word limit guidelines for that question as per the 'General assessment information' (Assessment Assignment General assessment information). My assignment file size is no larger than 2 MB. If tables were required, they are visible as text, not as links or images. I have not removed the marking grid from the footer. I have submitted my assignment as per the instructions Marker feedback Comment on overall performance: For marker use only. Instructions to students This assignment covers Topics 1 to 10 and accounts for 50% of your final grade. There is a focus on Topics 6 to 10 in the assignment. There are nine (9) questions in this assignment. You should answer all questions. Download the 'Assignment Excel template' (i.e. FIN201_AS_v4.xlsx) under 'Assignment' in -. This file contains data to enable you to answer questions (especially Questions 6 and 7). Your assignment submission must contain a Word document (as the primary document) and an Excel file (to provide backup and validation of your workings). Submit all Excel workings as separate tabs in one (1) Excel file. Name each tab in the file according to the identifying names as instructed in each question. The overall word limit for the assignment is 3500 words. Marks will only be awarded for answers up to the word limit (plus 10%) for each question. Any material written after this will not be counted towards your mark for that question. Headings, quotes and references within the body of the answer are included in the word count. Numerical tables, calculations, and reference lists are not included. For more information on word counts and their rationale, go to Assessment Assignment General assessment information. Refer to the Criteria-based Marking Guide for guidelines on what is expected for each question. The 'General assessment information' section contains information about format and presentation, For office use only # Max 1a 7 1b 4 2a 4 2b 3 2c 3 3a 2 3b 4 3c 3 3d 3 4a 2 4b 2 4c 2 4d 2 4e 5a 5b 5c 6a 6d 7a 7b 7c 7d 2 2 3 3 5 6b(i) 6b(ii 6c ) 2 3 3 2 2 2 2 2 7e 7f 7g 8a(i) 8a(ii 8b ) 2 2 1 9c 4 9d 4 Total 100 Awarded # Max Awarded # Max 2 2 2 8c(i) 8c(ii 9a ) 2 1 2 Awarded 9b 2 0 2 word limits, citations and referencing, collusion, plagiarism and other policies, useful resources, submitting your assignment and accessing your results. Full workings must be shown for all calculations. Show all calculations in the text of your assignment and NOT attached as an appendix. Appendices to assignments will not be read. Answers are to be in your own words. Reference and cite all your sources (within the text of your answer) when quoting or using material from external sources. Include a reference list at the end of your assignment. Refer to the 'Referencing and Citations Guide' available from the 'Library and Resource Centre' in - for further information on referencing. Indicative weightings are noted beside each question. Use these weightings to assist you with your allocation of time and resources. The weightings indicate the relative importance of each question. State all assumptions used in providing your answer. Requests for special consideration or information pertaining to special consideration written in the body of the assignment will not be considered by the marker. Refer to the 'special consideration' section of the Assessment Policy on website for more information. Criteria-based Marking Guide The Criteria-based Marking Guide provided at the end of each question is designed to assist students to understand what is expected of them in each question and to let them know how their performance will be judged. It provides advice about the criteria used in the marking of the question and what discriminates between an excellent, satisfactory and unsatisfactory answer. For office use only # Max 1a 7 1b 4 2a 4 2b 3 2c 3 3a 2 3b 4 3c 3 3d 3 4a 2 4b 2 4c 2 4d 2 4e 5a 5b 5c 6a 6d 7a 7b 7c 7d 2 2 3 3 5 6b(i) 6b(ii 6c ) 2 3 3 2 2 2 2 2 7e 7f 7g 8a(i) 8a(ii 8b ) 2 2 1 9c 4 9d 4 Total 100 Awarded # Max Awarded # Max 2 2 2 8c(i) 8c(ii 9a ) 2 1 2 Awarded 9b 2 0 3 Question 1 (11 marks | Word limit: 400 words) (a) Explain the concepts of beta risk (in terms of the capital asset pricing model (CAPM)) and diversifiable risk and how each relates to the relationship between total investment risk and expected return. (7 marks) (b) Discuss the limitations inherent in the CAPM approach to assessing risk? (4 marks) Criteria-based marking guide for Question 1(a)-(b) Excellent (Mark range: 8.5-11 marks) Satisfactory (Mark range: 4.5-8 marks) Correct identification and Mostly correct definition of identification and CAPM components definition of CAPM components Excellent and logical explanation of risk and Fair explanation of risk return concepts and return concepts Comprehensive analysis Adequate analysis of the of the limitations of CAPM limitations of CAPM Unsatisfactory (Mark range: 0-4 marks) Incorrect identification and definition of CAPM components Poor explanation of risk and return concepts Insufficient analysis of the limitations of CAPM Insert your answers to Question 1(a)-(b) below this line End of answers to Question 1(a)-(b) For office use only # Max 1a 7 1b 4 2a 4 2b 3 2c 3 3a 2 3b 4 3c 3 3d 3 4a 2 4b 2 4c 2 4d 2 4e 5a 5b 5c 6a 6d 7a 7b 7c 7d 2 2 3 3 5 6b(i) 6b(ii 6c ) 2 3 3 2 2 2 2 2 7e 7f 7g 8a(i) 8a(ii 8b ) 2 2 1 9c 4 9d 4 Total 100 Awarded # Max Awarded # Max 2 2 2 8c(i) 8c(ii 9a ) 2 1 2 Awarded 9b 2 0 4 Question 2 (10 marks | Word limit: 100 words) As an analyst you receive the following regression information: = 1 + 2Xt was estimated by the ordinary least squares method as: E(Yt) = 227.3642 + 6.4075Xt Yt Xt 2 nX 33.43 2 35.4198 2 Se Degrees of freedom = n - 2 = 10 (a) Perform a two-tail test of the null hypothesis H0:2 = 0 against the alternative H1:2 0 with = 0.05. Find the value of the t-statistic and the associated critical value for the test. Conclude whether the null hypothesis can be rejected at the 5% level. (4 marks) (b) Perform a one-tail test of the null hypothesis H0:2 = 0 against the alternative H1:2 > 0 with = 0.05. Find the value of the t-statistic and the associated critical value for the test. Conclude whether the null hypothesis can be rejected at the 5% level. (3 marks) (c) Construct a 95% confidence interval for 2. (3 marks) Note: You must show all workings for each part of the question. Criteria-based marking guide for Question 2(a)-(c) Excellent (Mark range: 7-10 marks) Satisfactory (Mark range: 4-6.5 marks) Unsatisfactory (Mark range: 0-3.5 marks) Correct calculation of each test Correct inputs to construction of confidence interval Correct construction of confidence interval Correct conclusions about rejecting the null hypothesis All workings shown Mostly correct calculation of each test Mostly correct inputs to construction of confidence interval Mostly correct conclusions about rejecting the null hypothesis Mostly correct construction of confidence interval Partial workings shown Incorrect or incomplete calculation of each test Incorrect inputs to or incomplete construction of confidence interval No or incorrect conclusions about rejecting the null hypothesis All workings not shown For office use only # Max 1a 7 1b 4 2a 4 2b 3 2c 3 3a 2 3b 4 3c 3 3d 3 4a 2 4b 2 4c 2 4d 2 4e 5a 5b 5c 6a 6d 7a 7b 7c 7d 2 2 3 3 5 6b(i) 6b(ii 6c ) 2 3 3 2 2 2 2 2 7e 7f 7g 8a(i) 8a(ii 8b ) 2 2 1 9c 4 9d 4 Total 100 Awarded # Max Awarded # Max 2 2 2 8c(i) 8c(ii 9a ) 2 1 2 Awarded 9b 2 0 5 Insert your answers to Question 2(a)-(c) below this line End of answers to Question 2(a)-(c) For office use only # Max 1a 7 1b 4 2a 4 2b 3 2c 3 3a 2 3b 4 3c 3 3d 3 4a 2 4b 2 4c 2 4d 2 4e 5a 5b 5c 6a 6d 7a 7b 7c 7d 2 2 3 3 5 6b(i) 6b(ii 6c ) 2 3 3 2 2 2 2 2 7e 7f 7g 8a(i) 8a(ii 8b ) 2 2 1 9c 4 9d 4 Total 100 Awarded # Max Awarded # Max 2 2 2 8c(i) 8c(ii 9a ) 2 1 2 Awarded 9b 2 0 6 Question 3 (12 marks | Word limit: 500 words) Bauman and Miller (1994) examine the hypothesis of modern portfolio theory that portfolio returns are positively correlated with risk as measured by beta (systematic risk) and sigma (standard deviation of return). They analyse how well portfolio returns in one market cycle are predicted by portfolio returns, sigma and beta in the previous market cycle, using a regression model. They conclude: Measuring and ranking the returns of portfolios over stock market cycles is very useful in predicting rankings and returns over the next market cycle; this is generally more useful than employing portfolios' betas and sigmas for prediction purposes. Predictions of portfolio returns are highly significant in all the market cycles when past returns are used in conjunction with portfolio sigmas, however. Explain how the figures in the exhibits (below) from the Bauman and Miller paper support their conclusions with regard to: (a) Treynor ratio (from Exhibit 4). (2 marks) (b) Predicted returns from beta and sigma (from Exhibits 5, 6 and 7). (4 marks) (c) Portfolio returns measured over the data period (from Exhibit 7). (3 marks) (d) Portfolio returns, sigma, and beta in the previous market cycle (from Exhibit 7). (3 marks) Note: You will need to understand the paper as a whole before you can interpret the exhibits. You can draw on exhibits other than the ones listed above if you wish. You must indicate which columns and figures are relevant to the conclusions for full marks. Reference: Bauman, WS & Miller, RE 1994, 'Can managed portfolio performance be predicted?', The Journal of Portfolio Management, vol. 20, no. 4, pp. 31-40 ('Required reading 2' in Topic 5). For office use only # Max 1a 7 1b 4 2a 4 2b 3 2c 3 3a 2 3b 4 3c 3 3d 3 4a 2 4b 2 4c 2 4d 2 4e 5a 5b 5c 6a 6d 7a 7b 7c 7d 2 2 3 3 5 6b(i) 6b(ii 6c ) 2 3 3 2 2 2 2 2 7e 7f 7g 8a(i) 8a(ii 8b ) 2 2 1 9c 4 9d 4 Total 100 Awarded # Max Awarded # Max 2 2 2 8c(i) 8c(ii 9a ) 2 1 2 Awarded 9b 2 0 7 Exhibit 4 Performance in the subsequent time period based on the quartile rankings of the Treynor ratios (TR) in the previous period Subsequent time period (t + 1) Previous quartile Ranking Average 2 Number 1st 4 5 2, 3, 4, 5 (2) (1) 3 (3) (4) (5) (6) 128 437 608 514 Number Return TR 127 8.8% 1.6 18.2% 11.3 32 18.3% 7.9 111 20.1% 8.4 157 19.0% 12.2 134 9.0% 1.7 16.6% 7.6 32 16.4% 5.7 108 18.1% 6.2 154 18.7% 11.4 124 8.6% 1.6 15.4% 6.2 Number Return TR 4th 161 19.5% 22.1 Number Return TR 3rd 114 23.3% 11.6 Number Return TR 2nd 32 21.0% 10.0 32 18.6% 7.5 104 17.0% 5.9 135 17.7% 10.5 129 8.6% 1.3 15.5% 6.3 6.3% 1.8% 0.2% 2.7% Return spread between Quartiles 1 and 4 2.4% Chi-squared value 13.16 64.77*** 27.17*** 9.61 0.32*** 0.20*** 0.07 Spearman rank correlation coefficient 0.11 *** Significant at the 0.01 level. Exhibit 5 Regression coefficients of portfolio returns regressed separately on sigma and beta In time period t pt pt 1 -0.26*** -7.91*** 2 1.42*** 14.08*** 3 0.37*** 5.07*** 4 -0.20*** -2.90*** For office use only # Max 1a 7 1b 4 2a 4 2b 3 2c 3 3a 2 3b 4 3c 3 3d 3 4a 2 4b 2 4c 2 4d 2 4e 5a 5b 5c 6a 6d 7a 7b 7c 7d 2 2 3 3 5 6b(i) 6b(ii 6c ) 2 3 3 2 2 2 2 2 7e 7f 7g 8a(i) 8a(ii 8b ) 2 2 1 9c 4 9d 4 Total 100 Awarded # Max Awarded # Max 2 2 2 8c(i) 8c(ii 9a ) 2 1 2 Awarded 9b 2 0 8 5 0.08** 0.42 *** Significant at the 0.01 level. ** Significant at the 0.05 level. For office use only # Max 1a 7 1b 4 2a 4 2b 3 2c 3 3a 2 3b 4 3c 3 3d 3 4a 2 4b 2 4c 2 4d 2 4e 5a 5b 5c 6a 6d 7a 7b 7c 7d 2 2 3 3 5 6b(i) 6b(ii 6c ) 2 3 3 2 2 2 2 2 7e 7f 7g 8a(i) 8a(ii 8b ) 2 2 1 9c 4 9d 4 Total 100 Awarded # Max Awarded # Max 2 2 2 8c(i) 8c(ii 9a ) 2 1 2 Awarded 9b 2 0 9 Exhibit 6 Return in the subsequent time period t + 1 based on quartile rankings of portfolio returns and subgroup sigma rankings in the previous time period t Quartile return Subgroup sigma Ranking in t Ranking in t 2 3 4 5 3, 4, 5 (1) (2) (3) (4) (5) (6) (7) 1st S4 36.0 27.6 17.0 9.6 18.1 S3 17.0 24.3 19.3 9.3 17.6 S2 15.6 20.3 19.8 8.6 16.2 S1 15.0 21.8 19.9 8.9 16.9 S4 23.6 19.3 16.2 8.7 14.7 S3 15.4 19.0 19.0 8.8 15.6 S2 12.4 21.3 19.7 8.6 16.5 S1 12.1 20.4 20.8 9.2 16.8 S4 24.8 18.0 16.3 10.2 14.8 S3 16.6 18.5 19.6 8.2 15.4 S2 14.0 17.9 19.4 8.5 15.3 S1 16.4 18.6 20.3 7.8 15.6 S4 25.5 16.2 17.0 7.6 13.6 S3 18.4 16.7 8.3 8.7 14.6 S2 18.3 18.3 18.6 8.4 15.1 S1 15.2 17.2 18.7 9.0 15.0 8 26-29 2nd 3rd 4th Portfolio returns in subsequent time period (t + 1) Average number of portfolios in each subgroup 35-40 Average 30-38 S4 Highest sigma. S3 Second-highest. S2 Second-lowest. S1 Lowest sigma. For office use only # Max 1a 7 1b 4 2a 4 2b 3 2c 3 3a 2 3b 4 3c 3 3d 3 4a 2 4b 2 4c 2 4d 2 4e 5a 5b 5c 6a 6d 7a 7b 7c 7d 2 2 3 3 5 6b(i) 6b(ii 6c ) 2 3 3 2 2 2 2 2 7e 7f 7g 8a(i) 8a(ii 8b ) 2 2 1 9c 4 9d 4 Total 100 Awarded # Max Awarded # Max 2 2 2 8c(i) 8c(ii 9a ) 2 1 2 Awarded 9b 2 0 10 Exhibit 7 Test of a regression portfolio performance model Adjusted Coefficients of the intercept term Coefficients of the preceding period return Coefficient of Coefficient of beta sigma Rp in time F-statistic R2 1 2(Rpt) 3(pt) 4(pt) n Period t +1 (2) (3) (4) (5) (6) (7) (8) 2 0.39 0.00 18.52*** 0.07 127 31.64*** 0.19 2.86 78.74*** 0.38 -2.21 19.55*** 0.23 0.55 0.26** 48.28*** 0.43 -4.55* 0.30*** 67.34*** 0.13 13.81*** 0.37*** 14.97*** 0.03 14.88*** 44.22*** 0.09 10.97*** 33.61*** 0.13 13.98*** 0.37*** 35.11*** 0.14 12.05*** 0.30*** 3.36* 0.00 17.83*** 0.04* 51.56*** 0.08 23.10*** 57.28*** 0.08 23.21*** 31.00*** 0.09 21.90*** 0.07*** 37.16*** 0.11 21.87*** 0.09*** 12.82*** 0.02 6.51*** 0.12*** 0.06 0.00 8.60*** 0.33 0.00 8.40*** 7.19*** 0.02 5.53*** 0.13*** 7.77*** 0.03 5.16*** * Significant at the 0.10 level. ** Significant at the 0.05 level. *** Significant at the 0.01 level. 0.13*** 3 4 5 15.67*** 127 0.79*** 17.72*** 127 127 0.87*** 127 436 5.04*** 436 0.64*** -0.26 436 436 0.21 436 607 -4.62*** 607 -0.24*** -4.95*** 607 607 -0.27*** 607 513 0.16 513 0.02 513 0.78 513 0.07 513 For office use only # Max 1a 7 1b 4 2a 4 2b 3 2c 3 3a 2 3b 4 3c 3 3d 3 4a 2 4b 2 4c 2 4d 2 4e 5a 5b 5c 6a 6d 7a 7b 7c 7d 2 2 3 3 5 6b(i) 6b(ii 6c ) 2 3 3 2 2 2 2 2 7e 7f 7g 8a(i) 8a(ii 8b ) 2 2 1 9c 4 9d 4 Total 100 Awarded # Max Awarded # Max 2 2 2 8c(i) 8c(ii 9a ) 2 1 2 Awarded 9b 2 0 11 Criteria-based marking guide for Question 3(a)-(d) Excellent (Mark range: 8-12 marks) Excellent and logical explanation of how and why most (or all) figures from exhibits 4, 5, 6 and 7 support conclusions Accurate indication of which figures and columns are relevant to conclusion Explanation integrates correct and relevant reference to five (5) or more types of statistical analyses specified in the question (a-d) and any other exhibits Satisfactory (Mark range: 4.5-7.5 marks) Unsatisfactory (Mark range: 0-4 marks) Adequate explanation of Little or no explanation of how and why most (or all) how and why any figures figures from exhibits 4, 5, from exhibits 4, 5, 6 and 6 and 7 support 7 support conclusions conclusions Explanation contains Explanation contains little or no (0-2) correct correct and relevant and relevant reference to reference to at least three the types of statistical (3) types of statistical analyses specified in the analyses specified in the question (a-d) question (a-d) Insert your answers to Question 3(a)-(d) below this line End of answers to Question 3(a)-(d) For office use only # Max 1a 7 1b 4 2a 4 2b 3 2c 3 3a 2 3b 4 3c 3 3d 3 4a 2 4b 2 4c 2 4d 2 4e 5a 5b 5c 6a 6d 7a 7b 7c 7d 2 2 3 3 5 6b(i) 6b(ii 6c ) 2 3 3 2 2 2 2 2 7e 7f 7g 8a(i) 8a(ii 8b ) 2 2 1 9c 4 9d 4 Total 100 Awarded # Max Awarded # Max 2 2 2 8c(i) 8c(ii 9a ) 2 1 2 Awarded 9b 2 0 12 Question 4 (10 marks | Word limit: 400 words) You are assigned the task of predicting the stock return for the raw materials sector. You propose that the raw materials sector stock returns are explained by the following four explanatory variables: industrial production growth rate 10-year Treasury bond yields inflation rate the spread in yields between BB rated bonds and AAA rated bonds. You run a multiple linear regression using 120 monthly observations (n) with the following results. Explanatory variable Regression coefficient Standard error Constant 2.00 1.25 Industrial production growth rate % 3.25 1.30 -0.50 0.20 Inflation rate % 0.28 2.00 Yield spreads % -0.20 2.05 10-year treasury bond yields % For the questions below, show full workings and explain the approach you take, including the reasons why particular statistics are used. You may utilise the template provided in the 'Q4' tab of the Excel spreadsheet, but you should present your answer, along with all workings (and formulas) in the assignment template. (a) From the data provided in the table above, calculate the t-statistic for the four (4) regression coefficients. (2 marks) (b) Which coefficient estimates are statistically significant at the 0.05 level? (2 marks) (c) What is the 95% confidence interval for the industrial production growth rate slope? (2 marks) (d) You make the following predictions: constant 1.0% industrial production growth rate 0.5% 10-year Treasury bond yield 4.0% inflation rate 3.0% yield spread 5.0% Based on these predictions and the regression results in the table above, what do you predict the raw materials sector return will be? (2 marks) For office use only # Max 1a 7 1b 4 2a 4 2b 3 2c 3 3a 2 3b 4 3c 3 3d 3 4a 2 4b 2 4c 2 4d 2 4e 5a 5b 5c 6a 6d 7a 7b 7c 7d 2 2 3 3 5 6b(i) 6b(ii 6c ) 2 3 3 2 2 2 2 2 7e 7f 7g 8a(i) 8a(ii 8b ) 2 2 1 9c 4 9d 4 Total 100 Awarded # Max Awarded # Max 2 2 2 8c(i) 8c(ii 9a ) 2 1 2 Awarded 9b 2 0 13 (e) Given the regression results in the table above, what is the expected change in the raw materials sector return in response to a one percentage point decrease in the industrial production growth rate (assuming no change in the remaining explanatory variables)? (2 marks) Criteria-based marking guide for Question 4(a)-(e) Excellent (Mark range: 7-10 marks) Correct calculation of tstatistics for 3-4 of regression coefficients Correct selection of the statistically significant coefficient estimates Correct identification of 95% confidence interval Correct expected change in raw materials sector return identified Correct expected change in raw materials sector return identified in response to percentage point increase Complete and accurate workings shown for most calculations of raw materials sector return Detailed and logical explanation of how and why particular approaches and particular statistics are used Satisfactory (Mark range: 4-6.5 marks) Unsatisfactory (Mark range: 0-3.5 marks) Correct calculation of tstatistics for at least 2 of the regression coefficients Correct selection of some of the statistically significant coefficient estimates Correct identification of 95% confidence interval Correct expected change in raw materials sector return identified Correct expected change in raw materials sector return identified in response to percentage point increase Mostly accurate workings shown for most calculations of raw materials sector return Adequate explanation of how and why particular approaches and particular statistics are used Incorrect calculation of tstatistics of 0-1 of regression coefficients No (or incorrect) selection of the statistically significant coefficient estimates Incorrect identification of 95% confidence interval Incorrect expected change in raw materials sector return identified Incorrect expected change in raw materials sector return identified in response to percentage point increase Inaccurate workings shown for most calculations of raw materials sector return Poor and incomplete explanation of how and why particular approaches and particular statistics are used Insert your answers to Question 4(a)-(e) below this line For office use only # Max 1a 7 1b 4 2a 4 2b 3 2c 3 3a 2 3b 4 3c 3 3d 3 4a 2 4b 2 4c 2 4d 2 4e 5a 5b 5c 6a 6d 7a 7b 7c 7d 2 2 3 3 5 6b(i) 6b(ii 6c ) 2 3 3 2 2 2 2 2 7e 7f 7g 8a(i) 8a(ii 8b ) 2 2 1 9c 4 9d 4 Total 100 Awarded # Max Awarded # Max 2 2 2 8c(i) 8c(ii 9a ) 2 1 2 Awarded 9b 2 0 14 End of answers to Question 4(a)-(e) For office use only # Max 1a 7 1b 4 2a 4 2b 3 2c 3 3a 2 3b 4 3c 3 3d 3 4a 2 4b 2 4c 2 4d 2 4e 5a 5b 5c 6a 6d 7a 7b 7c 7d 2 2 3 3 5 6b(i) 6b(ii 6c ) 2 3 3 2 2 2 2 2 7e 7f 7g 8a(i) 8a(ii 8b ) 2 2 1 9c 4 9d 4 Total 100 Awarded # Max Awarded # Max 2 2 2 8c(i) 8c(ii 9a ) 2 1 2 Awarded 9b 2 0 15 Question 5 (8 marks | Word limit: 300 words) Return Risk Total portfolio return: +11% Benchmark return: +9% Risk 15% Risk 16% Active return: +2% Tracking error: 4% a Stock selection: -4% Currency: +4% Country selection: +2% Style: +2% Industry: -2% Risk 4% Risk 2% Risk 2% Risk 1% Risk 2% IR = -1 IR = 2 IR = 1 IR = 2 IR = -1 s a s After analysing the management of the investment portfolio, shown in the diagram above: (a) Explain the overall result of the active management. (2 marks) (b) Describe the strengths and weaknesses of the portfolio manager as indicated by returns. What actions might be taken on the basis of this analysis? (3 marks) (c) What is an information ratio and how is it used in portfolio management? Describe the strengths and weaknesses of the portfolio manager as indicated by information ratios. (3 marks) For office use only # Max 1a 7 1b 4 2a 4 2b 3 2c 3 3a 2 3b 4 3c 3 3d 3 4a 2 4b 2 4c 2 4d 2 4e 5a 5b 5c 6a 6d 7a 7b 7c 7d 2 2 3 3 5 6b(i) 6b(ii 6c ) 2 3 3 2 2 2 2 2 7e 7f 7g 8a(i) 8a(ii 8b ) 2 2 1 9c 4 9d 4 Total 100 Awarded # Max Awarded # Max 2 2 2 8c(i) 8c(ii 9a ) 2 1 2 Awarded 9b 2 0 16 Criteria-based marking guide for Question 5(a)-(c) Excellent (Mark range: 6-8 marks) Satisfactory (Mark range: 3.5-5.5 marks) Unsatisfactory (Mark range: 0-3 marks) Comprehensive analysis of the performance of the active management Correct definition of information ratio and its applications Correct analysis of the manager's information ratio All relevant workings shown Adequate analysis of the performance of the active management Mostly correct definition of information ratio and its applications Mostly correct analysis of the manager's information ratio Most relevant workings shown Insufficient analysis of the performance of the active management Incorrect definition of information ratio and its applications Incorrect analysis of the manager's information ratio Incomplete or no relevant workings shown Insert your answers to Question 5(a)-(c) below this line End of answers to Question 5(a)-(c) For office use only # Max 1a 7 1b 4 2a 4 2b 3 2c 3 3a 2 3b 4 3c 3 3d 3 4a 2 4b 2 4c 2 4d 2 4e 5a 5b 5c 6a 6d 7a 7b 7c 7d 2 2 3 3 5 6b(i) 6b(ii 6c ) 2 3 3 2 2 2 2 2 7e 7f 7g 8a(i) 8a(ii 8b ) 2 2 1 9c 4 9d 4 Total 100 Awarded # Max Awarded # Max 2 2 2 8c(i) 8c(ii 9a ) 2 1 2 Awarded 9b 2 0 17 Resources for Questions 6, and 7 Note: The construction of the model for this assignment is based on a number of underlying assumptions. You have been provided with data on a number of stocks to build a model for the following questions, although not all stocks are used for all questions. The data to enable you to answer Questions 6 and 7 . Data in different tabs is used for different questions. The model will hold a portfolio of some of these 10 stocks, the returns of which are considered to be random variables. The volatility of the portfolio return is selected as a measure of risk. Stock price movements are assumed to be related to a total of three explanatory variables (or factors) size, momentum and value, defined below: size: the logarithm of the market capitalisation, which is the number of shares issued, multiplied by the share price. LOG or LOG10 Excel functions are applied instead of the LN Excel function momentum: the rolling three-month price return, which is the percentage change of the current price from the price three months ago value: the earnings yield, which is the percentage earnings per share divided by the price per share. The monthly data provided for this assignment are for the 96 months from January 2001 to December 2008. The monthly data are split into two periods: in-sample period (84 months from January 2001 to December 2007) out-of-sample period (12 months from January 2008 to December 2008). In this regression model, monthly returns can be considered as a linear combination of the three explanatory variables and a specific return (random error). Once the model for each stock is estimated, the portfolio risk of the stocks can be calculated simply by using the: covariance matrices of the three common factors' coefficients associated three common factors' exposures (matrix of observations on the independent variables) covariance matrix of specific returns. Note: A model-based covariance matrix of total returns is used for risk analysis (rather than the historic data-based covariance matrix) for the 10 stocks. In order to estimate the covariance matrix of the three factors' coefficients, a sample of the coefficients of the three common factors from the cross-sectional regressions has to be obtained. Using the ordinary least squares (OLS) method for each month over the in-sample period, 10 stock returns (the dependent variables) are regressed against the associated three factors' exposures. These cross-sectional regressions are repeated for each month over the in-sample period. For office use only # Max 1a 7 1b 4 2a 4 2b 3 2c 3 3a 2 3b 4 3c 3 3d 3 4a 2 4b 2 4c 2 4d 2 4e 5a 5b 5c 6a 6d 7a 7b 7c 7d 2 2 3 3 5 6b(i) 6b(ii 6c ) 2 3 3 2 2 2 2 2 7e 7f 7g 8a(i) 8a(ii 8b ) 2 2 1 9c 4 9d 4 Total 100 Awarded # Max Awarded # Max 2 2 2 8c(i) 8c(ii 9a ) 2 1 2 Awarded 9b 2 0 18 The covariance matrix of the three regression coefficients is estimated, based on the monthly regression coefficients over the different months. With the three factors' exposures, the 'common factor' covariance matrix can be calculated at any month. The covariance matrix of specific returns is added to the common factor covariance matrix to obtain the model-based covariance matrix of total returns at any month. For office use only # Max 1a 7 1b 4 2a 4 2b 3 2c 3 3a 2 3b 4 3c 3 3d 3 4a 2 4b 2 4c 2 4d 2 4e 5a 5b 5c 6a 6d 7a 7b 7c 7d 2 2 3 3 5 6b(i) 6b(ii 6c ) 2 3 3 2 2 2 2 2 7e 7f 7g 8a(i) 8a(ii 8b ) 2 2 1 9c 4 9d 4 Total 100 Awarded # Max Awarded # Max 2 2 2 8c(i) 8c(ii 9a ) 2 1 2 Awarded 9b 2 0 19 The results obtained are then used to forecast the volatility of monthly returns of each stock and/or a portfolio of stocks at a month over the out-of-sample period, given certain values of the three factors' exposures. Note: no prior knowledge of risk-factor modelling is assumed express returns and their volatilities as percentages to two (2) decimal places report all elements in the correlation and covariance matrices to six (6) decimal places be consistent in the use of measurement units for all calculations. For office use only # Max 1a 7 1b 4 2a 4 2b 3 2c 3 3a 2 3b 4 3c 3 3d 3 4a 2 4b 2 4c 2 4d 2 4e 5a 5b 5c 6a 6d 7a 7b 7c 7d 2 2 3 3 5 6b(i) 6b(ii 6c ) 2 3 3 2 2 2 2 2 7e 7f 7g 8a(i) 8a(ii 8b ) 2 2 1 9c 4 9d 4 Total 100 Awarded # Max Awarded # Max 2 2 2 8c(i) 8c(ii 9a ) 2 1 2 Awarded 9b 2 0 20 Question 6 (a) (15 marks | Word limit: 600 words) The 'Q6a' tab in the Excel spreadsheet provides the summary statistics of 84 regressions based on cross-sectional data for each month between January 2001 and December 2007. The following summary statistics are shown in the spreadsheet: multiple R R-square adjusted R-square standard error significance of F. Define each of the above terms and interpret each of the statistics in regards to the data over the time period from January 2001 to December 2007. (5 marks) (b) (i) Consider the following notations: Ri = return of stock i for a particular month Xi1 = exposure of stock i to the constant unit of 1 Xi2 = exposure of stock i to the size Xi3 = exposure of stock i to the momentum Xi4 = exposure of stock i to the value f1 = the intercept term f2 = the regression coefficient of size f3 = the regression coefficient of momentum f4 = the regression coefficient of value. Complete the formula for the specific returns (or residual term) of stock i for a particular month, Ui, given the information above and the linear regression model. What do the specific returns attempt to measure? (2 marks) (ii) Calculate the monthly specific returns (i.e. the residuals of the regressions) for CBA, WES and BHP for the 84-month in-sample period. To do this calculation, use the formula derived from part (i), the data given in the notations in part (i), and the data in the 'Q6b' tab of the Excel spreadsheet. From your Excel results, paste a copy of the specific returns for CBA, WES and BHP for the months of January 2001 and December 2007 only in the Word document of your assignment (and in the format below). (3 marks) Month CBA WES BHP Jan. 2001 Dec. 2007 For office use only # Max 1a 7 1b 4 2a 4 2b 3 2c 3 3a 2 3b 4 3c 3 3d 3 4a 2 4b 2 4c 2 4d 2 4e 5a 5b 5c 6a 6d 7a 7b 7c 7d 2 2 3 3 5 6b(i) 6b(ii 6c ) 2 3 3 2 2 2 2 2 7e 7f 7g 8a(i) 8a(ii 8b ) 2 2 1 9c 4 9d 4 Total 100 Awarded # Max Awarded # Max 2 2 2 8c(i) 8c(ii 9a ) 2 1 2 Awarded 9b 2 0 21 (c) Calculate the historical covariance of the monthly specific returns for CBA, WES and BHP for the 84-month in-sample period. From your Excel results, paste a copy of the monthly specific returns covariance matrix for CBA, WES and BHP in the Word document of your assignment (and in the format below). See the 'Q6c-d' tab of the Excel spreadsheet. (3 marks) Monthly specific returns covariance matrix CBA WES BHP CBA WES BHP (d) Calculate the historical annualised volatility (standard deviation) of the monthly specific returns for CBA, WES and BHP for the 84-month in-sample period. From your Excel results, paste a copy of the annualised specific returns volatilities for CBA, WES and BHP in the Word document of your assignment (and in the format below). See the 'Q6c-d' tab of the Excel spreadsheet. (2 marks) Annualised specific returns volatilies CBA WES BHP CBA WES BHP For office use only # Max 1a 7 1b 4 2a 4 2b 3 2c 3 3a 2 3b 4 3c 3 3d 3 4a 2 4b 2 4c 2 4d 2 4e 5a 5b 5c 6a 6d 7a 7b 7c 7d 2 2 3 3 5 6b(i) 6b(ii 6c ) 2 3 3 2 2 2 2 2 7e 7f 7g 8a(i) 8a(ii 8b ) 2 2 1 9c 4 9d 4 Total 100 Awarded # Max Awarded # Max 2 2 2 8c(i) 8c(ii 9a ) 2 1 2 Awarded 9b 2 0 22 Criteria-based marking guide for Question 6(a)-(d) Excellent (Mark range: 11-15 marks) Satisfactory (Mark range: 6-10.5 marks) Correct definition of statistics Correct interpretation of statistics Correct completion of formula and correct and logical explanation of what specific returns measure attempts to measure Correct and complete calculation of monthly specific returns Correct and complete calculation of annualised historical variance Adequate definition of statistics Adequate interpretation of statistics Correct completion of formula and correct explanation of what specific returns measure attempts to measure Correct and mostly complete calculation of monthly specific returns Correct and mostly complete calculation of annualised historical variance Unsatisfactory (Mark range: 0-5.5 marks) Incorrect definition of statistics Incorrect interpretation of statistics Incorrect completion of formula and correct explanation of what specific returns measure attempts to measure Incorrect and incomplete calculation of monthly specific returns Incorrect and/or incomplete calculation of annualised historical variance For office use only # Max 1a 7 1b 4 2a 4 2b 3 2c 3 3a 2 3b 4 3c 3 3d 3 4a 2 4b 2 4c 2 4d 2 4e 5a 5b 5c 6a 6d 7a 7b 7c 7d 2 2 3 3 5 6b(i) 6b(ii 6c ) 2 3 3 2 2 2 2 2 7e 7f 7g 8a(i) 8a(ii 8b ) 2 2 1 9c 4 9d 4 Total 100 Awarded # Max Awarded # Max 2 2 2 8c(i) 8c(ii 9a ) 2 1 2 Awarded 9b 2 0 23 Insert your answers to Question 6(a)-(d) below this line End of answers to Question 6(a)-(d) For office use only # Max 1a 7 1b 4 2a 4 2b 3 2c 3 3a 2 3b 4 3c 3 3d 3 4a 2 4b 2 4c 2 4d 2 4e 5a 5b 5c 6a 6d 7a 7b 7c 7d 2 2 3 3 5 6b(i) 6b(ii 6c ) 2 3 3 2 2 2 2 2 7e 7f 7g 8a(i) 8a(ii 8b ) 2 2 1 9c 4 9d 4 Total 100 Awarded # Max Awarded # Max 2 2 2 8c(i) 8c(ii 9a ) 2 1 2 Awarded 9b 2 0 24 Question 7 (14 marks | Word limit: 400 words) Answer the questions below, providing reasons and valid arguments to demonstrate your understanding of regression limitations and how to manage them in practice. (a) Describe the four (4) conditions that must be satisfied for a regression analysis to be valid. (2 marks) (b) Describe two (2) ways of dealing with heteroscedasticity. (2 marks) (c) Calculate the rolling 12-month volatility of price returns for each of the 10 stocks over the in-sample period using data in the 'Q7' tab in the Excel spreadsheet. (2 marks) Note: The rolling 12-month volatility at any month is the annualised standard deviation using the monthly returns of the preceding 12 months. Save your Excel workings for part (c) as a tab labelled '7c'. (d) Draw a graph of the results in part (c). Based on the graph, describe the relationship between volatilities of stocks over time. (2 marks) (e) Explain the Durbin-Watson test and how its results should be interpreted. (2 marks) (f) Why would a transformation of the dependent variable be used? Describe what sorts of transformations are commonly used. (2 marks) (g) Explain four (4) steps in a backward elimination stepwise regression approach. (2 marks) For office use only # Max 1a 7 1b 4 2a 4 2b 3 2c 3 3a 2 3b 4 3c 3 3d 3 4a 2 4b 2 4c 2 4d 2 4e 5a 5b 5c 6a 6d 7a 7b 7c 7d 2 2 3 3 5 6b(i) 6b(ii 6c ) 2 3 3 2 2 2 2 2 7e 7f 7g 8a(i) 8a(ii 8b ) 2 2 1 9c 4 9d 4 Total 100 Awarded # Max Awarded # Max 2 2 2 8c(i) 8c(ii 9a ) 2 1 2 Awarded 9b 2 0 25 Criteria-based marking guide for Question 7(a)-(g) Excellent (Mark range: 10.5-14 marks) Satisfactory (Mark range: 6-10 marks) Unsatisfactory (Mark range: 0-5.5 marks) Clear and accurate description of four (4) conditions for valid regression analysis Full and accurate description of two (2) ways of dealing with heteroscedasticity Correct and complete calculations of price returns for each of 10 stocks Logical, full and correct description of the relationship between volatilities of stocks over time and at any specific month Correct, logical and full description of the Durbin-Watson test and explanation of how its results should be interpreted Correct and full explanation of why a transformation of the dependent variable would be used and clear descriptions of transformations used Four complete and correct steps explained in a backward elimination stepwise regression approach Adequate and accurate description of four (4) conditions for valid regression analysis Adequate and accurate description of two (2) ways of dealing with heteroscedasticity Correct and complete calculations of price returns for each of 10 stocks Adequate and correct description of the relationship between volatilities of stocks over time and at any specific month Mostly correct and full description of the Durbin-Watson test and explanation of how its results should be interpreted Mostly correct explanation of why a transformation of the dependent variable would be used and adequate descriptions of transformations used Four steps explained in a backward elimination stepwise regression approach Inaccurate and unclear description of less than four (4) conditions for valid regression analysis Unclear and/or inaccurate description of ways of dealing with heteroscedasticity Incorrect and/or incomplete calculations of price returns for most stocks Unclear and/or incorrect description of the relationship between volatilities of stocks over time and at any specific month Poor and/or incorrect description of the DurbinWatson test and explanation of how its results should be interpreted Poor and/or incorrect explanation of why a transformation of the dependent variable would be used and unclear or no descriptions of transformations used Poor, incomplete and/or incorrect steps explained in a backward elimination stepwise regression approach For office use only # Max 1a 7 1b 4 2a 4 2b 3 2c 3 3a 2 3b 4 3c 3 3d 3 4a 2 4b 2 4c 2 4d 2 4e 5a 5b 5c 6a 6d 7a 7b 7c 7d 2 2 3 3 5 6b(i) 6b(ii 6c ) 2 3 3 2 2 2 2 2 7e 7f 7g 8a(i) 8a(ii 8b ) 2 2 1 9c 4 9d 4 Total 100 Awarded # Max Awarded # Max 2 2 2 8c(i) 8c(ii 9a ) 2 1 2 Awarded 9b 2 0 26 Insert your answers to Question 7(a)-(g) below this line End of answers to Question 7(a)-(g) For office use only # Max 1a 7 1b 4 2a 4 2b 3 2c 3 3a 2 3b 4 3c 3 3d 3 4a 2 4b 2 4c 2 4d 2 4e 5a 5b 5c 6a 6d 7a 7b 7c 7d 2 2 3 3 5 6b(i) 6b(ii 6c ) 2 3 3 2 2 2 2 2 7e 7f 7g 8a(i) 8a(ii 8b ) 2 2 1 9c 4 9d 4 Total 100 Awarded # Max Awarded # Max 2 2 2 8c(i) 8c(ii 9a ) 2 1 2 Awarded 9b 2 0 27 Question 8 (8 marks | Word limit: 400 words) Use Figure 1 to answer the questions below. Expected return Figure 1 Portfolio B Portfolio A Portfolio choice Volatility () (a) (i) What does Figure 1 depict and what is the financial name or description given to the diagram? (2 marks) (ii) (b) Which portfolio (A or B) would be preferred and why? (2 marks) Explain how volatility is measured with respect to Figure 1. (1 mark) (c) (i) A portfolio manager decides to allocate superannuation funds of their recent clients who are more risk averse than average. What would the portfolio manager need to do to achieve this outcome? (2 marks) (ii) Briefly state where this portfolio of assets would be represented with respect to Figure 1. (1 mark) For office use only # Max 1a 7 1b 4 2a 4 2b 3 2c 3 3a 2 3b 4 3c 3 3d 3 4a 2 4b 2 4c 2 4d 2 4e 5a 5b 5c 6a 6d 7a 7b 7c 7d 2 2 3 3 5 6b(i) 6b(ii 6c ) 2 3 3 2 2 2 2 2 7e 7f 7g 8a(i) 8a(ii 8b ) 2 2 1 9c 4 9d 4 Total 100 Awarded # Max Awarded # Max 2 2 2 8c(i) 8c(ii 9a ) 2 1 2 Awarded 9b 2 0 28 Criteria-based marking guide for Question 8(a)-(c) Excellent (Mark range: 6-8 marks) Satisfactory (Mark range: 3.5-5.5 marks) Clear and accurate description of the figure and portfolios Correct interpretation of volatility Clear and accurate explanation of risk aversion and portfolio construction Unsatisfactory (Mark range: 0-3 marks) Adequate description of the Poor description of the figure and portfolios figure and portfolios Mostly correct interpretation Incorrect interpretation of volatility of volatility Fair explanation of risk Poor explanation of risk aversion and aversion and portfolio construction portfolio construction For office use only # Max 1a 7 1b 4 2a 4 2b 3 2c 3 3a 2 3b 4 3c 3 3d 3 4a 2 4b 2 4c 2 4d 2 4e 5a 5b 5c 6a 6d 7a 7b 7c 7d 2 2 3 3 5 6b(i) 6b(ii 6c ) 2 3 3 2 2 2 2 2 7e 7f 7g 8a(i) 8a(ii 8b ) 2 2 1 9c 4 9d 4 Total 100 Awarded # Max Awarded # Max 2 2 2 8c(i) 8c(ii 9a ) 2 1 2 Awarded 9b 2 0 29 Insert your answers to Question 8(a)-(c) below this line End of answers to Question 8(a)-(c) For office use only # Max 1a 7 1b 4 2a 4 2b 3 2c 3 3a 2 3b 4 3c 3 3d 3 4a 2 4b 2 4c 2 4d 2 4e 5a 5b 5c 6a 6d 7a 7b 7c 7d 2 2 3 3 5 6b(i) 6b(ii 6c ) 2 3 3 2 2 2 2 2 7e 7f 7g 8a(i) 8a(ii 8b ) 2 2 1 9c 4 9d 4 Total 100 Awarded # Max Awarded # Max 2 2 2 8c(i) 8c(ii 9a ) 2 1 2 Awarded 9b 2 0 30 Question 9 (12 marks | Word limit: 400 words) Assume that we have estimated the following AR(1) model: Xt = 0.0825 + 0.7654Xt - 1 + et Furthermore, assume that the current level of X is 0.4968. (a) Forecast the value of X at time 1 (X1) and time 4 (X4). (2 marks) (b) Which of these two forecasts is likely to be more reliable? Why? (2 marks) (c) What is serial correlation? How do we test for its presence in this model? (4 marks) (d) What is the mean reverting level of this model? What does this mean? (4 marks) Criteria-based marking guide for Question 9(a)-(d) Excellent (Mark range: 8-12 marks) Satisfactory (Mark range: 4.5-7.5 marks) Correct calculation and interpretation of model forecast Clear and accurate description of serial correlation Correct and full explanation of the appropriate test of serial correlation Correct calculation and interpretation of the mean reverting level All relevant workings shown Mostly correct calculation and interpretation of model forecast Adequate description of serial correlation Mostly correct explanation of the appropriate test of serial correlation Mostly correct calculation and interpretation of the mean reverting level Most relevant workings shown Unsatisfactory (Mark range: 0-4 marks) Incorrect calculation and interpretation of model forecast Poor description of serial correlation Incorrect and full explanation of the appropriate test of serial correlation Incorrect calculation and interpretation of the mean reverting level Little or no working shown Insert your answers to Question 9(a)-(d) below this line End of answers to Question 9(a)-(d) END OF ASSIGNMENT For office use only # Max 1a 7 1b 4 2a 4 2b 3 2c 3 3a 2 3b 4 3c 3 3d 3 4a 2 4b 2 4c 2 4d 2 4e 5a 5b 5c 6a 6d 7a 7b 7c 7d 2 2 3 3 5 6b(i) 6b(ii 6c ) 2 3 3 2 2 2 2 2 7e 7f 7g 8a(i) 8a(ii 8b ) 2 2 1 9c 4 9d 4 Total 100 Awarded # Max Awarded # Max 2 2 2 8c(i) 8c(ii 9a ) 2 1 2 Awarded 9b 2 0 31 Topic 5 Required reading 2 Bauman, WS & Miller, RE 1994, 'Can managed portfolio performance be predicted?', The Journal of Portfolio Management, vol. 20, no. 4, pp. 31-40. COPYRIGHT COMMONWEALTH OF AUSTRALIA Copyright Regulations 1969 WARNING This material has been reproduced and communicated to you by or on behalf of Kaplan Higher Education pursuant to Part VB of the Copyright Act 1968 (the Act). The material in this communication may be subject to copyright under the Act. Any further reproduction or communication of this material by you may be the subject of copyright protection under the Act. Do not remove this notice