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Question 4 This question relates to material covered in topics 1-5. This question addresses the 1st, 2nd and 3rd subject learning outcomes.

Question 4


This question relates to material covered in topics 1-5. This question addresses the 1st, 2nd and 3rd subject learning outcomes.


a. find the monthly holding period return for 2016 for the National Australia Bank (NAB), BHP Billiton (BHP) and the market (MKT) as proxied by the all Ordinaries index. The monthly holding period return is the return you would receive if you brought an asset on the first day of the month (opening price) and sold it in the last day of the month (closing price). Using Excel,graph your % return results on one graph with returns on the y axis and the time on the x axis to enable comparison between options . (Use 'Close' rather than 'Adjusted Close' for the selling price.) Note; Opening price must equal previous month closing price.


b. For each investment, what is the average monthly holding period return?


c. For each investment, what is the annual holding period return?


d. Calculate the standard deviation of the monthly rates of return for each share and the market.


e. Using excel plot your result from (C) and (D) above with risk on the x axis and return on the y axis.


f. If the 10 year government bond rate is 2.95% and the long term return on the market is 6.5% assuming the beta for NAB is 1.23 and for the BHP is 0.90, use the capital asset pricing model (CAPM) to find the expected return for NAB and BHP.


g. Construct and graph the security market line (SML) showing where NAB and BHP lie.


h. Based on your finding construct a portfolio made up of 30% CBA and 70% RIO. Calculate the estimated return and beta for this portfolio.


i. Based on your understanding of the CAPM and the SML, which of the asset(S) or portfolio(S) would you invest in and which would you not invest in.Explain your choice

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