You are working as an investment analyst in the research department of IPA. Investments. The head of the research department has provided you with monthly historical data on the stocks of Scales Corp. (SCL.NZ), Sanford (SAN.NZ), and the NZX50 index as well as the risk- free rate (90-day Bank-bill); and he has asked you to analyze the data for the purpose of investments in the New Zealand stock market. In particular, he wants you to do the following: Part A: Quantitative Research (15 marks) a) Determine what the average returns and standard deviations of returns per annum based on the historical data are for the two stocks and NZX50 index. (6 marks) b) Use regression analysis to evaluate the market risk (beta) and the intercept (alpha) of the two stocks. Also, report the beta and alpha for the NZX50 index. (5 marks) Give an interpretation of your findings from the regression analysis, particularly the estimated beta and alpha values of the two stocks and their implications on the stock price. (4 marks) c) Part B: Security Market Line (10 marks) Suppose that you use the three average returns per annum calculated in Part (a) as the estimates of the expected returns for the two stocks and market portfolio, respectively. Suppose that the risk-free rate is 0.8% per annum. a) Plot a risk-return graph with beta on the x-axis and returns on the y-axis, which shows the Security Market Line, the market portfolio, and the actual returns of the two stocks. (4 marks) b) Determine the fair expected returns for the two stocks according to CAPM (4 marks) c) Discuss your findings. (2 marks) Part C: Portfolio Construction (10 marks) a) Construct a portfolio that invests 50% in SCL stock and 50% in SAN stock, and to estimate beta and expected return for this portfolio. Comment on your findings on this portfolio. (5 marks) b) Compare the estimated beta and expected return of the portfolio with those for the two individual stocks. (5 marks) Name SCL price SAN price NZX50 index 90 DAY BANK BILL (RFR) Jan-15 1. 43 4. 80 5568. 28 Feb-15 1.52 4. 95 5756.68 Mar-15 1.55 4. 95 5892. 67 Apr-15 1. 57 4. 85 5835. 58 May-15 1.63 4. 86 5797. 40 Jun-15 1. 73 5. 10 5844. 95 Jul-15 1.70 5. 20 5794. 35 Aug-15 2. 00 5.07 5957. 85 Sep-15 2.00 5. 01 5654. 99 Oct-15 2. 02 4. 90 5585. 43 Nov-15 2. 11 4. 95 5983. 84 Dec-15 2. 23 5. 70 6150. 68 Jan-16 2. 46 5. 60 6324. 26 Feb-16 2. 28 5. 70 6174. 49 Mar-16 2. 35 6. 40 6280.90 Apr-16 3. 08 6. 20 6708.02 May-16 3. 35 6.00 6791.82 Jun-16 3. 31 5. 80 7022. 40 Jul-16 2. 98 5. 56 6926. 23 Aug-16 3. 27 5. 62 7356.63 Sep-16 3. 21 5. 85 7423. 19 Oct-16 3. 20 6. 38 7372. 49 Nov-16 3.10 6. 26 6930. 49 Dec-16 3. 47 6. 75 6932. 74 Jan-17 3. 45 6. 78 6881.22 Feb-17 3. 41 7.00 7055. 50 Mar-17 3. 45 7.50 7148. 78 Apr-17 3. 43 7.32 7225.01 May-17 3. 35 7. 27 7382.22 Jun-17 3. 33 7.15 7450.90 Jul-17 3. 34 6.95 7588. 43 Aug-17 3. 40 7.25 7729. 44 Sep-17 3. 39 7.36 7821.98 Oct-17 3. 70 7.90 7928. 89 Nov-17 3. 78 7.90 8053. 81 Dec-17 3. 87 8. 07 8188.83 Jan-18 4. 78 8. 30 8398. 08 Feb-18 4. 78 7.96 8383. 87 Mar-18 4. 49 7. 70 8342. 71 Apr-18 4. 51 7. 43 8319.07 May-18 4. 51 7.60 8435. 97 % p. a. 3. 67 3. 64 3. 63 3. 64 3. 62 3. 47 3. 24 3. 06 2. 89 2. 83 2.95 2.85 2. 75 2. 69 2. 56 2. 33 2. 38 2. 42 2. 42 2. 26 2. 23 2. 20 2.13 2.04 2. 00 2.02 2.00 2.00 1. 98 1.95 1.99 1. 96 1. 96 1. 94 1. 95 1.91 1.88 1.89 1.92 1.97 2. 03 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 4. 66 4. 63 4. 61 4. 81 4. 90 4. 63 4. 47 4. 50 4. 40 4. 74 4. 98 4. 98 4. 75 4. 67 4. 55 4. 77 5. 00 5. 21 5. 19 5. 01 4. 63 4. 10 4. 43 4. 88 4. 92 4. 97 4. 93 7. 70 7. 70 7.62 7. 70 7.95 7. 39 6.70 6.60 6.68 6.60 6.97 6.83 6. 75 6. 81 6. 71 6. 75 6.80 7.05 7.80 7.95 7.56 6. 90 6.59 7.00 6. 85 6. 35 6. 49 8636. 16 8942. 47 8859. 92 9257.29 9327. 27 8843. 83 8876.09 8811. 27 8999.17 9351.68 9853. 91 9966. 42 10117.99 10464. 53 10860.82 10800.00 10996.99 10761.69 11301.98 11491.90 11550.16 11103. 43 9926. 08 10449. 01 10882. 41 11350. 27 11666.09 2.01 1.98 1.91 1. 90 1.90 1.94 1.97 1.97 1.93 1.89 1.84 1. 79 1.64 1.62 1. 46 1.18 1.09 1.12 1. 22 1.29 1. 25 0.90 0.49 0.26 0.26 0.30 0.30 You are working as an investment analyst in the research department of IPA. Investments. The head of the research department has provided you with monthly historical data on the stocks of Scales Corp. (SCL.NZ), Sanford (SAN.NZ), and the NZX50 index as well as the risk- free rate (90-day Bank-bill); and he has asked you to analyze the data for the purpose of investments in the New Zealand stock market. In particular, he wants you to do the following: Part A: Quantitative Research (15 marks) a) Determine what the average returns and standard deviations of returns per annum based on the historical data are for the two stocks and NZX50 index. (6 marks) b) Use regression analysis to evaluate the market risk (beta) and the intercept (alpha) of the two stocks. Also, report the beta and alpha for the NZX50 index. (5 marks) Give an interpretation of your findings from the regression analysis, particularly the estimated beta and alpha values of the two stocks and their implications on the stock price. (4 marks) c) Part B: Security Market Line (10 marks) Suppose that you use the three average returns per annum calculated in Part (a) as the estimates of the expected returns for the two stocks and market portfolio, respectively. Suppose that the risk-free rate is 0.8% per annum. a) Plot a risk-return graph with beta on the x-axis and returns on the y-axis, which shows the Security Market Line, the market portfolio, and the actual returns of the two stocks. (4 marks) b) Determine the fair expected returns for the two stocks according to CAPM (4 marks) c) Discuss your findings. (2 marks) Part C: Portfolio Construction (10 marks) a) Construct a portfolio that invests 50% in SCL stock and 50% in SAN stock, and to estimate beta and expected return for this portfolio. Comment on your findings on this portfolio. (5 marks) b) Compare the estimated beta and expected return of the portfolio with those for the two individual stocks. (5 marks) Name SCL price SAN price NZX50 index 90 DAY BANK BILL (RFR) Jan-15 1. 43 4. 80 5568. 28 Feb-15 1.52 4. 95 5756.68 Mar-15 1.55 4. 95 5892. 67 Apr-15 1. 57 4. 85 5835. 58 May-15 1.63 4. 86 5797. 40 Jun-15 1. 73 5. 10 5844. 95 Jul-15 1.70 5. 20 5794. 35 Aug-15 2. 00 5.07 5957. 85 Sep-15 2.00 5. 01 5654. 99 Oct-15 2. 02 4. 90 5585. 43 Nov-15 2. 11 4. 95 5983. 84 Dec-15 2. 23 5. 70 6150. 68 Jan-16 2. 46 5. 60 6324. 26 Feb-16 2. 28 5. 70 6174. 49 Mar-16 2. 35 6. 40 6280.90 Apr-16 3. 08 6. 20 6708.02 May-16 3. 35 6.00 6791.82 Jun-16 3. 31 5. 80 7022. 40 Jul-16 2. 98 5. 56 6926. 23 Aug-16 3. 27 5. 62 7356.63 Sep-16 3. 21 5. 85 7423. 19 Oct-16 3. 20 6. 38 7372. 49 Nov-16 3.10 6. 26 6930. 49 Dec-16 3. 47 6. 75 6932. 74 Jan-17 3. 45 6. 78 6881.22 Feb-17 3. 41 7.00 7055. 50 Mar-17 3. 45 7.50 7148. 78 Apr-17 3. 43 7.32 7225.01 May-17 3. 35 7. 27 7382.22 Jun-17 3. 33 7.15 7450.90 Jul-17 3. 34 6.95 7588. 43 Aug-17 3. 40 7.25 7729. 44 Sep-17 3. 39 7.36 7821.98 Oct-17 3. 70 7.90 7928. 89 Nov-17 3. 78 7.90 8053. 81 Dec-17 3. 87 8. 07 8188.83 Jan-18 4. 78 8. 30 8398. 08 Feb-18 4. 78 7.96 8383. 87 Mar-18 4. 49 7. 70 8342. 71 Apr-18 4. 51 7. 43 8319.07 May-18 4. 51 7.60 8435. 97 % p. a. 3. 67 3. 64 3. 63 3. 64 3. 62 3. 47 3. 24 3. 06 2. 89 2. 83 2.95 2.85 2. 75 2. 69 2. 56 2. 33 2. 38 2. 42 2. 42 2. 26 2. 23 2. 20 2.13 2.04 2. 00 2.02 2.00 2.00 1. 98 1.95 1.99 1. 96 1. 96 1. 94 1. 95 1.91 1.88 1.89 1.92 1.97 2. 03 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 4. 66 4. 63 4. 61 4. 81 4. 90 4. 63 4. 47 4. 50 4. 40 4. 74 4. 98 4. 98 4. 75 4. 67 4. 55 4. 77 5. 00 5. 21 5. 19 5. 01 4. 63 4. 10 4. 43 4. 88 4. 92 4. 97 4. 93 7. 70 7. 70 7.62 7. 70 7.95 7. 39 6.70 6.60 6.68 6.60 6.97 6.83 6. 75 6. 81 6. 71 6. 75 6.80 7.05 7.80 7.95 7.56 6. 90 6.59 7.00 6. 85 6. 35 6. 49 8636. 16 8942. 47 8859. 92 9257.29 9327. 27 8843. 83 8876.09 8811. 27 8999.17 9351.68 9853. 91 9966. 42 10117.99 10464. 53 10860.82 10800.00 10996.99 10761.69 11301.98 11491.90 11550.16 11103. 43 9926. 08 10449. 01 10882. 41 11350. 27 11666.09 2.01 1.98 1.91 1. 90 1.90 1.94 1.97 1.97 1.93 1.89 1.84 1. 79 1.64 1.62 1. 46 1.18 1.09 1.12 1. 22 1.29 1. 25 0.90 0.49 0.26 0.26 0.30 0.30