Question1-
(a) The following are the historic returns for Tokyo Limited:
|
Year
|
Tokyo Ltd
|
Nikkei Index
|
|
1
|
0.10
|
0.12
|
|
2
|
0.07
|
0.06
|
|
3
|
-0.02
|
-0.01
|
|
4
|
0.10
|
0.02
|
|
5
|
0.05
|
0.04
|
|
6
|
-0.08
|
-0.04
|
(i) Compute the standard deviation for the company and the index.
(ii) Compute the correlation coefficient between Tokyo Ltd and the index.
(iii) Compute the beta for Tokyo Ltd.
(b) "One of the assumptions of the Capital Asset Pricing Model (CAPM) assumes all investors can borrow or lend at the risk free rate of interest. Clearly, this assumption is unrealistic, therefore, makes the prediction of the CAPM meaningless".
Do you agree or disagree on this statement? Fully explain your answer and use diagram if necessary.
Question 2- (a) What is the difference between Fundamental Analysis and Technical Analysis? Explain which technique is preferable when investing in Australian stock market and why?
(b) Would you expect a steel company or a retail food chain company to have greater business risk? Discuss this expectation in terms of the components of business risk.
(c) Brig Company has just paid a cash dividend of $0.20 per share. Investors require a 16 percent return from investments such as this. What is the price today for Brig Company if the dividend is expected to grow at 20 percent for the next three years and then settle down to 8 percent per year indefinitely?
Question 3- (a) What are the major risks faced by Australian investors while investing in overseas equity markets?
(b) Mega Mutual Fund owns only the 4 stocks shown below with no fund expenses.
|
Stock
|
Shares
|
Price
|
|
A
|
1,800
|
$15
|
|
B
|
2,200
|
$11
|
|
C
|
2,300
|
$9
|
|
D
|
1,900
|
$18
|
The fund originated by selling $300,000 of stock at $30.00 per share. What is the Net Asset Value (NAV) for Mega Mutual Fund?
(c) At the beginning of the year, Thomas invested $4,000 in eighty shares of Shahara Corporation. During the year, Shahara paid dividends of $5 per share. At the end of the year, Thomas sold the eighty shares for $59 a share. Compute his total holding period yield (HPY) on these shares and indicate how much was due to the price change and how much was due to the dividend income.
Question 4-
(a) Suppose you are asked to analyses three managed funds having the following characteristics:
|
MANAGED FUND OR ASSET
|
AVERAGE RETURN (%)
|
STANDARD DEVIATION (%)
|
BETA
|
|
BT Australia
|
9.3
|
30.0
|
0.6
|
|
First State
|
11.2
|
28.9
|
0.9
|
|
Vanguard
|
4.6
|
21.6
|
0.9
|
|
All Ordinaries Index
|
10.1
|
22.0
|
1.0
|
|
Risk-free Rate
|
8.0
|
-
|
-
|
(i) Calculate the Sharpe and Treynor's measures for the above three managed funds and the market.
(ii) Based on your calculation for (i) above, rank the above managed funds and comment on the rankings drawing attention to any differences in the rankings.
(b) Performance attribution analysis decomposes an actively managed allocation and selection effects.
REQUIRED: In your own words explain how these two effects are measured and why their sum must equal the total value added return for the fund. Would the attribution analysis be valid if the level of riskiness varies between the fund portfolio and the benchmark to which the fund is being compared to?