Free sample   Portfolio management assignment analysis based on business scenarios

Portfolio Management Assignment: Analysis Based on Business Scenarios

Question

You are supposed to prepare a portfolio management assignment addressing the following questions:

Question 1
The spreadsheet contains daily returns on 10 different stocks and the S&P/ASX200. The S&P/ASX200 is a proxy for the market portfolio. The daily returns are total returns and incorporate price changes and dividend payments. As the annual risk-free rate is very close to zero and you are using daily data, we can assume that the daily risk-free rate is zero. You are required to pick one stock from Group 1 and one stock from Group B to use in this question. You cannot pick two stocks from the same group.

 Group 1 Group 2 NextDC Limited  (NXT) Flight Centre Travel Group Ltd (FLT) Evolution Mining Ltd (EVN) Santos Ltd (STO) Saracen Mineral Holdings Ltd (SAR) Macquarie Group Ltd (MQG) Domino's Pizza Enterprises Ltd (DMP) Scentre Group (SCG) ASX Limited (ASX.AX) Downer EDI Limited (DOW)

Using the two stocks you have chosen you need to conduct separate analysis for 2019 and 2020 to better understand risk and return. Throughout the assessment, you need to link your calculations to what has been happening in financial markets.

a) The Single Index Model

1. Estimate the Single Index Model for each stock separately for 2019 and 2020 using Excel. You will need to estimate four regressions in total (2 stocks x 2 years).
2. Discuss the differences in beta between the two stocks in 2019 and 2020. What explains the differences?
3. Discuss the change in beta from 2019 to 2020 for each stock.What explains the differences?
4. How has total risk, systematic risk and idiosyncratic risk changed for each stock? What do you think has caused these changes for the two stocks?
5. Did the alpha and beta estimates from 2019 provide a reasonable prediction of stock returns in 2020 for the two stocks you are analysing? Why or why not?
6. Your discussion of the abovepoints needs to incorporate relevant qualitative information on the two stocks from your own research.

b) Multifactor models, such as the Fama-French 3-factor model, are used extensively in finance. Do you think a multifactor model would help improve your results in part 1a? Why or why not?

c) Perform an Event Study on your two stocks selected between 2/3/2020 and 1/6/20. What can you infer about the efficiency of financial markets from the stock return behaviour?

d) Using the data from 2019 only, which of the two stocks that you selected would you invest in if you were adding it to an investment in an Australia market index fund (S&P/ASX200). Why?

Question 2
A 4-year zero coupon bond has a face value of \$100 and a price of \$85.480. The table below contains prices, coupons and time to maturity for 3 annual coupon paying bonds that have a face value of \$100.

 Time to Maturity (Years) Annual Coupon Price 1 3.0% \$99.038 2 8.5% \$108.487 3 6.5% \$106.937

use 3 decimal places in your working.

a) What is the price of a 3-year bond paying annual coupons of 4% and a face value of \$100?

b) If you had \$1million invested in the 3-year 4% coupon bond, how many of the 4-year zero-coupon bonds would you need to short-sell to hedge your interest rate risk?

Portfolio Management Assignment Question 1

1.a
1.a.I) Estimation of Single Index Model

 NXT 2019 SUMMARY OUTPUT Regression Statistics Multiple R 0.463909 R Square 0.21521156 Adjusted R Square 0.21208492 Standard Error 0.01550792 Observations 253 ANOVA df SS MS F Significance F Regression 1 0.01655365 0.01655365 68.8314201 6.6166E-15 Residual 251 0.06036437 0.0002405 Total 252 0.07691802 Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept -0.0003629 0.00097984 -0.3703638 0.71142382 -0.0022926 0.00156685 -0.0022926 0.00156685 S&P/ASX200 1.1705699 0.14109252 8.29647034 6.6166E-15 0.8926938 1.44844601 0.8926938 1.44844601 NXT - 2020 SUMMARY OUTPUT Regression Statistics Multiple R 0.55359365 R Square 0.30646593 Adjusted R Square 0.30370285 Standard Error 0.01311638 Observations 253 ANOVA df SS MS F Significance F Regression 1 0.01908166 0.01908166 110.914448 1.0202E-21 Residual 251 0.04318189 0.00017204 Total 252 0.06226354 Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept 0.00083899 0.00082873 1.01238149 0.31233059 -0.0007932 0.00247115 -0.0007932 0.00247115 S&P/ASX200 1.25677788 0.11933407 10.5315929 1.0202E-21 1.02175417 1.49180159 1.02175417 1.49180159 STO - 2019 SUMMARY OUTPUT Regression Statistics Multiple R 0.59962695 R Square 0.35955248 Adjusted R Square 0.35333454 Standard Error 0.02071719 Observations 105 ANOVA df SS MS F Significance F Regression 1 0.02481863 0.02481863 57.825042 1.3912E-11 Residual 103 0.04420781 0.0004292 Total 104 0.06902644 Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept -0.0026889 0.00203417 -1.3218801 0.18913638 -0.0067232 0.00134537 -0.0067232 0.00134537 S&P/ASX200 0.49313666 0.0648499 7.60427787 1.3912E-11 0.36452218 0.62175115 0.36452218 0.62175115 STO - 2020 SUMMARY OUTPUT Regression Statistics Multiple R 0.71742402 R Square 0.51469723 Adjusted R Square 0.50998555 Standard Error 0.01803414 Observations 105 ANOVA df SS MS F Significance F Regression 1 0.03552772 0.03552772 109.23864 7.3203E-18 Residual 103 0.03349872 0.00032523 Total 104 0.06902644 Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept -0.0002165 0.00176149 -0.1229229 0.90240765 -0.00371 0.00327697 -0.00371 0.00327697 S&P/ASX200 0.34182405 0.03270502 10.451729 7.3203E-18 0.27696135 0.40668675 0.27696135 0.40668675

1.a.II) Discussion in Two stocks in 2019 and 2020
From the analysis, it has been identified that NXT stock was 1.1705699 in 2019 and in 2020 it increases to 1.25677788. On the other hand, Santos Ltd (STO) stock was 0.49313666 and by 2020 it is also increased to 0.34182405.

1.a.III) Discussion on change of Beta
In 2019, beta value of NextDC Limited (NXT) was 0.21521156 and by 2020 it increases to 0.30646593. Total different of beta value for NextDC Limited (NXT) is 0.09125437 which indicating that company has high revenue in compare to last year business.

In case of Santos Ltd (STO), beta value was 0.359552476 in 2019 and in 2020 it is also increased to 0.509985552. Total different of beta value in stock market is 0.15514475 for Santos Ltd (STO).

1.a.IV) Risks
As per the results, there are very less in total risk, systematic risk and idiosyncratic risk that affect the change of stock for both the NXT and STO organisation.

1.a.V) Estimation
Yes, both the alpha and beta estimates from 2019 provides reasonable prediction in the return of stock 2020.

1.a.VI) Discussion on above point
At the point when both the firm fires up and raises working capital, it will be described by a low proportion of genuine to add up to resources. At the point when it is in full creation, it will have a high proportion of genuine resources. At the point when the venture "closes down" and the firm sells it, the level of genuine advantages for complete resources goes down again because the item is again traded into money related resources.

1.b) Multifactor Model
Models utilizing various components are utilized by resource proprietors, resource directors, venture experts, and hazard supervisors for an assortment of portfolio development, portfolio the board, chance administration, and general systematic purposes. In contrast with single-factor models (commonly dependent on a market chance factor), multifaceted models offer expanded informative force and adaptability. These similar qualities of multifaceted models permit experts to

• assemble portfolios that imitate or alter in an ideal manner the attributes of a specific record;
• build up wanted introductions to at least one hazard factors, including those that express explicit full-scale desires, (for example, sees on swelling or monetary development), in portfolios;
• perform granular hazard and profit attribution for effectively oversaw portfolios;
• comprehend the near hazard introductions of value, fixed-salary, and other resource class returns;
• distinguish dynamic choices comparative with a benchmark and measure the estimating of those choices; and
• Guarantee that a financial specialist's total portfolio is meeting dynamic hazard and return goals equivalent with dynamic charges.

Hence, by using this model, graph can be plotted in better way and result will be more accurate.

1.c) Performing Event Study
NEXTDC, Australia's driving Data-Center-as-a-Service supplier has opened its most up to date server farm in Perth, with a strip cutting function administered by the Hon. Dave Kelly MLA, Western Australia's Minister of Innovation and ICT.

Gone to by a regarded crowd speaking to the WA innovation, Enterprise and Government parts, also Chair Commissioner, Mr Andrew Hammond, Parliamentary Secretary to the Premier, Mr John Carey, and recognized visitors from the Premiers' office, and City of Perth gathering individuals; the occasion praised the official opening of the office, and the significant job P2 will play in driving development and opportunity in the WA computerized economy.

From the provided data, it is analysed that Santos surely has been working superbly of late as it's been developing profit more than most different organizations. One chance is that the P/E is low since financial specialists figure this solid income execution may be less fantastic pushing ahead. On the off chance that not, at that point, existing investors have the motivation to be very hopeful about the future bearing of the offer cost.

1.d) Investment Analysis
From the performance of 2019 of both the company NXT and STO, major investment will goes to Santos Ltd (STO) because of high growth in market share.

Question 2
2.a) Price of 3 Years Bond

 Par Value: 100 Nominal Yield: 5% Annual Coupon Payment: \$5 Maturity: 5 years Market Interest Rate = 4% Bond = 5 [ 1 – 1 ] + 100 = 104.49 Price 0.04 (1.02)10 (1.02)10 Bond Price 100.4902

2.b) Interest Rate of Risk

 Column 1 Column 2 Column 3 Column 4 Column 5 Time till Payment Cash Flow PV of CF (Discount rate 4% Weight Column 1* Column 4 1 40000 38461.568 0.038 0.038 2 40000 36982.249 0.037 0.074 3 1040000 924556.213 0.925 2.775 Total 1000000.00 1 2.886

D = 2.886 Years

Here, W is weight that calculated as the portfolio investment in 4 years is zero.

W*4 = 2.886 = w = 0.722

However, investment in 4 years zero will be 0.722* 1000000 = \$722000

In order to hedge the interest rate of risk, the 4 year zero coupon bond needs to short sell.

\$722000/85.480 = \$8446.420

Hence, \$8446.420 is calculated as the 4 year zero coupon bonds that has low risks interest rate.

Bibliography
Shaikh, O. (2020). On the relevance of higher-moments for portfolio-management within Islamic finance. International Journal of Islamic and Middle Eastern Finance and Management.

Jaafar, K., & Yusof, S. (2019). Evaluating Stakeholder's Level of Involvement in Project Execution Phase. Portfolio management assignment The Journal of Modern Project Management, 7(1).

Kernstock, J., & Powell, S. M. (2018). Twenty-five years of the Journal of Brand Management. Journal of Brand Management, 25(6), 489-493.

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