ECO-M015 Finance Autumn 2014
1
ECO-M015 Finance: Assessment II
This assessment counts for 20% of the overall module grade.
Instructions: Use the dataset provided to complete this
assessment. The dataset shows daily
close prices of eleven stocks (labelled 0-9 and A), and the
FTSE 100 index during July, August
and September 2014.
All students will be using the FTSE 100 and Stock A. In
addition, each of you will use one of the
other ten stocks, whose number corresponds to the last digit
of your student ID number. We
will refer to this in the text below as âyour stockâ.
ANSWER BOTH PARTS.
PART A: Return statistics
Note all calculations should be carried out for the whole
period.
1. Calculate the daily returns of the FTSE 100, stock A, and
your stock. Present just your
answers for September in a table. [5 marks]
2. Calculate the average daily returns of the FTSE 100,
stock A, and your stock. [6 marks]
Comment on the ranking of these assets; try to relate these
statistics to recent developments in
the financial markets. [4 marks]
3. Calculate the standard deviations of the FTSE 100, stock
A, and your stock. [6 marks]
Comment on the riskiness of these assets according to their
volatilities; try to relate these
statistics to recent developments in the financial markets.
[4 marks]
4. Calculate the correlation between stock A and the FTSE
100, and between your stock and the
FTSE 100. [5 marks] Do you have any evidence to show that
your stock âmoves with the marketâ
more than stock A does? [5 marks]
5. Calculate the betas of stock A and your stock. [5 marks]
Interpret these numbers. [5 marks]
Do these numbers make sense empirically? [5 marks]
[In parts 2 & 3 you are asked to comment on recent
developments in financial markets. We are
looking for you to comment on some combination of the
relevant performance of âyour stockâ,
âstock Aâ and the FTSE 100. There may be something specific
during the period that you might
wish to comment upon. This could be to do with either the
broader economy, or the specific
industry the companies operate in, or perhaps even something
specific to one of the
companies.]ECO-M015 Finance Autumn 2014
2
PART B: Portfolio analysis
Let us consider a two-share portfolio which comprises stock
A and your stock.
6. Write down the expression for the daily return of your
portfolio (based on historical data),
and its volatility. Describe your notation clearly. [4
marks] Explain why historical data might not
be useful for the purposes of investing? Why is historical data
still often used? [6 marks]
7. Calculate the return, and standard deviation of the
following portfolios.
(i) All stock A
(ii) All your stock
(iii) 25% stock A; 75% your stock
(iv) 75% stock A; 25% your stock
(v) Equally weighted
Chart the risk/return profile using these portfolios; mark
the corresponding number of each
portfolio on your chart. [10 marks]
8. Explain the term âefficient frontierâ. Hence or
otherwise, identify which one(s) of the
portfolios above are inefficient. Carefully justify your choice.
[10 marks]
9. Assume that the daily risk-free rate is negligible. Which
of the above portfolios is optimal
according to the Sharpe ratio? Explain your answer
carefully. [10 marks]
10. Which of the above portfolios would you recommend to an
extremely risk-averse investor?
Why? [10 marks]
End of Assessment
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