i. Find the monthly holding period returns for 2016 for Commonwealth Bank (CBA), Rio Tinto (RIO) and the market (MKT) as proxied by the All Ordinaries index. The monthly holding period return is the return you would receive if you bought an asset on the first day of the month (opening price) and sold it on the last day of the month (closing price). Using Excel, graph your % return results on one graph with returns on the y axis and time on the x axis to enable comparison between options. (Use ‘Close’ rather than ‘Adjusted Close’ for the selling price) Note: Monthly opening price MUST equal previous month closing price. When calculating return students should use the previous period closing value as the opening value for their next calculation. It is recommended that students use a line graph within the Excel chart options to allow effective comparison of performance between the different securities (15 marks).
ii. For each investment, what is the average monthly holding period return? (6 marks).
iii. For each investment, what is the annual holding period return? (6 marks).
iv. Calculate the standard deviation of the monthly rates of return for each share and the market (9 marks).
v. Using Excel plot your results from (iii) and (iv) above with risk on the x axis and return on the y axis (3 marks).
v. If the 10 year government bond rate is 3.25% and the long term return on the market is 7%, assuming the beta (β) for CBA is 1.11 and for RIO is 0.95, use the Capital Asset Pricing Model (CAPM) to find the expected returns for CBA and RIO (6 marks).
vi. Construct the Security Market Line (SML) showing where CBA and RIO lie (5 marks).
vii. Based on your findings construct a portfolio made up of 60% CBA and 40% RIO. Calculate the estimated return and β for this portfolio (4 marks).
viii. Based on your understanding of the CAPM and the SML, which of these asset(s) or portfolio(s) would you invest in and which would you not invest in. Explain your choice (6 marks).
