Question 1 Assume: a company has a portfolio of five investment projects

Project 1 Project 2 Project 3 Project 4 Project 5 Peer Group Market (for betas) 2007 -4.00% -4.15% -12% -17.75% -10.50% -7.35% -3% 2008 -7.23% 1.22% 11.35% -18.25% 5.50% -9.27% -1.20% 2009 7.85% 5.50% 7.20% -7.60% -7.75% 8.25% 3.75% 2010 8.37% 8.05% 3.50% 12.55% 11.22% 11.37% 4.50% 2011 9.05% 10.15% 10.27% 10.30% 10.65% 10.95% 7.10% 2012 -11.30% -3.30% 7.33% 9.64% 5.35% 10.50% 6.17% 2013 9.17% 8.90% 2.57% 11.55% 1.33% 7.75% 3.19% 2014 10.55% 9.33% 2.90% 10.90% 17.21% 8.30% 3.30% 2015 12.27% 10.60% 4.53% 8.30% 15.00% 8.92% 4.22% 2016 13.52% 9.50% 6.20% 9.25% 12.00% 6.70% 5.70% 2017 -8.30% -3.30% 8.05% 8.78% 9.37% -7.90% 2.55% 2018 12.65% 8.60% 7.30% 8.87% 3.37% 10.35% 2.47% 2019 15.24% 7.95% 6.50% 9.33% 3.30% 11.28% 2.15% 2020 -8.30% 5.10% 6.35% 7.27% 8.15% 6.05% -3.35% 2021 12.00% 11.00% 27% 33% 9.85% 8.73% 7.05% 2022 16.5% 7.5% 7.2% 24.7% 11.7% 15.3% -0.10% 2023 11.0% 8.1% 8.0% 15.3% 12.8% 11.9% 2.9% *

2022 - 2023 years data are forecasts Portfolio weights

Scenario 1 18% 15% 22% 27% 18% 100% Portfolio weights Scenario 2 22% 27% 12% 21% 18% 100%

Step 1: Analyze each project returns, ranking projects in terms of:

1. average historical returns for 2007-2021

2. riskiness of returns over 2007-2021 period

3. average expected returns for 2007-2021 excluding years of the crises (2007-2008 and 2020-2021)

4. riskiness of returns over 2007-2021 period excluding years of the crises.

Step 2: Calculate betas for each project and the peer group for the following periods (use Market portfolio):

1. 2007-2021

2. Ex-crises period 2007-2021 (excluding 2007-2008 and 2020-2021) Use either regression or SLOPE command method for calculating betas.

3. Rank each project in terms of its betas and discuss their rankings.

How do betas change across 1. and 2. above and why?

Step 3: Plot in a scattergram chart risk-return relationships for all projects, peer group and the market:

On X-axis, plot given period riskiness of returns

On Y-axis, plot corresponding average returns for the same period.

Using the same graph, plot these risk-return relationships by project for the following two sub-periods:

Period 1: 2007-2021

Period 2: 2007-2021 excluding years of the crises

Analyze risk-return performance of each investment project across all periods and across periods excluding major crises.

Step 4: As in Step 3 above, plot in a scattergram chart risk-return relationships for all projects, peer group and the market:

Period 1: 2007-2021

Period 3: 2007-2023

Analyze risk-return performance of each investment project across Periods 1 and 3.

Step 5: As an analyst reviewing 5 investment projects, what can you conclude about each project risk-adjusted performance? Which project(s) would you recommend the firm to undertake and why, assuming the firm can only pursue 2 projects of its choice?

Step 6: Suppose the company total Investment Projects Portfolio is defined by two sets of weights: Scenario 1 and Scenario 2 (lines 22 and 23 above). What is the total return to firm Investments Portfolio under each scenario? How do these returns compare to the benchmark portfolio (Peer Group) on risk-adjusted basis (hint: you should compare beta (Scenario 1 Portfolio) to beta (Scenario 2 portfolio) against peer portfolio beta. Use Market portfolio for betas.