PART II

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.[10 marks]

For each, discuss the real-event in detail and how it might have affected the company performance on the day (or over the days). Discuss how All Ordinaries (Australian market index) responded on the same day (or over the days). Discuss your findings with reference to the impact of unsystematic and systematic risks. If your answer contains plagiarised materials, no marks will be given.

2. Which asset, your stock or the market index, would require a higher risk premium and why?[5 marks]

3. Suppose that you consider forming a two-asset portfolio by investing 20% of your wealth in your first stock and 80% in the market index.3.1Compute the beta of your portfolio.[2 marks]

3.2Compute the required return of your portfolio. Use 6.5% as a market risk premium and the 10-year government bond rate on 1 April 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-monthly" under Interest Rates. The units of rates shown are per cent (%) per annum.[4 marks]

3.3Compute the standard deviation of your portfolio.[6 marks]

3.4Compute 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)[7 marks]

3.5Is 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 Yaxis when you locate your portfolio in the graph.

4. Compare the standard deviations of your stock and the market index. What does the comparison tell you? Also set a 95% prediction interval for 2020 April's return for your stock and the market index and interpret the values.[3 marks]

5. In this assignment, you have learnt how to estimate rE. Briefly describe how you did it and comment on the usefulness and importance of rE.[4 marks