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Part A: RISK AND RETURN (30 marks) Use historical prices of the Australia market index All Ordinaries (AORD) and the following four companies traded in the Australian market: Rio Tinto plc (RIO), BHP Billiton Ltd (BHP.AX), ANZ Ltd. (ANZ. AX) and Wesfarmers Ltd. (WES) provided on CloudDeakin, answer the following questions: Compute continuously compounded monthly return of the above stocks and index using adjusted Close Price (Adj Close) (5 marks). Hint: Use Excel finction In to compute the compounded monthly return. a. Rt-In Close Price) -In Close Price-1) where In means natural logarithm. b. Compute monthly and yearly expected return for the above stocks and index under the assumption of equal probabilities for all possible returns (5 marks). Compute return correlation coefficient between two stocks and between each stock and the market index. Which pair of stocks has the highest and lowest correlation? Which stock(s) has the highest and lowest correlations with the market? (5 marks) c. Hint: Use Excel function CORRELO to compute the correlation coefficient between two data series. between stocks in (c)? If you were to form a portfolio of2 stocks, which ones would you choose to maximise the benefit of diversification? Give reasons for your answer (6 marks) Assume Rf to be 1.5% pa and E(Rin) to be 6% p.a. Using the CAPM model, calculate the expected return for each stock and compare it with (b). Explain why the expected return from the CAPM is different from answers in (b)? Is the stock undervalued or overvalued? Explain your answer. (9 marks) e. Part A: RISK AND RETURN (30 marks) Use historical prices of the Australia market index All Ordinaries (AORD) and the following four companies traded in the Australian market: Rio Tinto plc (RIO), BHP Billiton Ltd (BHP.AX), ANZ Ltd. (ANZ. AX) and Wesfarmers Ltd. (WES) provided on CloudDeakin, answer the following questions: Compute continuously compounded monthly return of the above stocks and index using adjusted Close Price (Adj Close) (5 marks). Hint: Use Excel finction In to compute the compounded monthly return. a. Rt-In Close Price) -In Close Price-1) where In means natural logarithm. b. Compute monthly and yearly expected return for the above stocks and index under the assumption of equal probabilities for all possible returns (5 marks). Compute return correlation coefficient between two stocks and between each stock and the market index. Which pair of stocks has the highest and lowest correlation? Which stock(s) has the highest and lowest correlations with the market? (5 marks) c. Hint: Use Excel function CORRELO to compute the correlation coefficient between two data series. between stocks in (c)? If you were to form a portfolio of2 stocks, which ones would you choose to maximise the benefit of diversification? Give reasons for your answer (6 marks) Assume Rf to be 1.5% pa and E(Rin) to be 6% p.a. Using the CAPM model, calculate the expected return for each stock and compare it with (b). Explain why the expected return from the CAPM is different from answers in (b)? Is the stock undervalued or overvalued? Explain your answer. (9 marks) e