QUESTION 1:
a. What are the three most important determinants of the price of a bond? Describe the effect of each on the price of a bond.
b. Explain the meaning of bond ratings. What are the implications of bond ratings for potential investors?
c. What are Exchange-traded Australian Government Bonds? Are there any risks associated with these bonds?
QUESTION 2
TABLE 1 (below) includes price data on the ASX All Ordinaries Index, Wesfarmers Limited (which owns Coles) and Woolworths Limited from years 2005 to 2015:
TABLE 1: (Source: https://au.finance.yahoo.com)
Year All Ordinaries Wesfarmers Woolworths Market Wesfarmers Woolworths
Index (Market Limited Limited Returns Returns Returns
2005 4708.8 18.9922 9.61035
2006 5461.6 21.07258 14.22607
2007 6421 23.4822 21.01378
2008 3659.3 11.60563 17.27901
2009 4882.7 21.65905 19.20301
2010 4846.9 23.41564 19.6086
2011 4111 23.08883 19.55875
2012 4664.6 30.98662 24.66703
2013 5353.1 38.93328 30.05066
2014 5388.6 38.97753 28.76203
2015 5174.3 37.06 23.1
E(R)
Risk
(a) Complete Table above by calculating the annual returns for the All Ordinaries Index, Wesfarmers Limited and Woolworths Limited in the first step and the expected return and risk for each in the second step. The completed table MUST be submitted with your assignment. Show ALL workings here in an appendix at the end of your assignment.
(b) Based on your results in Table 1, assess the performance of Wesfarmers and Woolworths against the market as a whole and against each other in the last ten years. Your answer should address the following issues:
(i) Briefly explain the type of business Wesfarmers and Woolworths conducts, what industry they are in and their ASX codes.
(ii) Possible reasons for the difference in Wesfarmers and Woolworths historical returns relative to each other and the market.
You may make use of other sources including newspapers, articles, books, media etc. to support your answer. Your answer should not exceed 800 words.
QUESTION 3:
You are the manager of Bollinger Managed Funds. Your company offers a number of investment
products to suit different investors. Amongst the selection they have the following three portfolios:
Your task is to answer the following questions by referring to your textbook, other finance books, the media, the internet etc.:
(a) By using the information in TABLE 2 (page 4) calculate the expected (average) return, denoted by E(R), and the risk (standard deviation), for each of the five assets as well as the three portfolios in Table 2 and include your answers in the table.
The completed table MUST be submitted with your assignment. Show ALL workings in the Appendix after the reference list. All final calculations should be correct to two decimal places (two numbers after the dot point) expressed as a percentage. The workings in the appendix may be hand-written. Do not include the workings in the appendix when submitting electronically through TURNITIN. (15 marks)
(b) Explain the meaning of correlation and how the correlation coefficient impacts the risk of a portfolio. Include in your answer the meaning of the correlation coefficients (-1.0; +1.0; and 0) given in Table for each of the three portfolios and the effect it has had on the risk. Your answer should not exceed 400 words.
(c) Discuss the meaning of diversification in finance. Discuss the impact that diversification has had on the expected return and risk for the three portfolios in Table. Your answer should not exceed 400 words.
TABLE: Historical returns
Year Asset A Asset B Asset C Asset D Asset E Portfolio 1 Portfolio 2 Portfolio 3
(A, B) (C, D) (A, E)
1995 5.81% 1.80% 18.41% 8.73% 8.04% 3.81% 13.57% 6.93%
1996 3.21% 4.40% 18.72% 8.92% 8.11% 3.81% 13.82% 5.66%
1997 7.61% 0.00% 26.58% 13.70% 5.29% 3.81% 20.14% 6.45%
1998 7.48% 0.13% 20.38% 9.93% 4.85% 3.81% 15.15% 6.17%
1999 4.21% 3.40% 4.48% 0.26% 5.05% 3.81% 2.37% 4.63%
2000 4.61% 3.00% 23.14% 11.61% 6.26% 3.81% 17.38% 5.43%
2001 7.61% 0.00% 13.40% 5.68% 5.03% 3.81% 9.54% 6.32%
2002 0.23% 7.38% 13.89% 5.98% 5.10% 3.81% 9.94% 2.67%
2003 7.61% 0.00% 8.56% 2.74% 4.65% 3.81% 5.65% 6.13%
2004 1.72% 5.89% 20.33% 9.90% 5.96% 3.81% 15.12% 3.84%
2005 5.22% 2.39% 12.57% 5.18% 5.67% 3.81% 8.88% 5.44%
2006 0.44% 7.17% 9.96% 3.59% 7.59% 3.81% 6.77% 4.02%
2007 7.39% 0.22% 9.35% 3.22% 6.60% 3.81% 6.29% 7.00%
2008 7.57% 0.04% 47.22% 26.24% 7.26% 3.81% 36.73% 7.41%
2009 2.56% 5.05% 6.73% 1.63% 3.52% 3.81% 4.18% 3.04%
2010 7.35% 0.26% 9.76% 3.47% 4.18% 3.81% 6.61% 5.77%
2011 7.45% 0.16% 23.66% 11.92% 4.76% 3.81% 17.79% 6.11%
2012 0.31% 7.30% 16.22% 7.40% 4.65% 3.81% 11.81% 2.48%
2013 7.61% 0.00% 5.39% 0.81% 2.88% 3.81% 3.10% 5.24%
2014 0.03% 7.58% 16.18% 7.38% 2.80% 3.81% 11.78% 1.42%
E(R)
Risk
Correlation
coefficient -1.0 +1.0 0