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Pick up 8 stocks of your choice, preferably from different industries. Go to the recommended websites or any other website that offers historical stock data and financial information, such as the Yahoo Finance, Australian Stock Exchange or any other source of financial information. Download monthly closing share prices for the most recent 36 months (from 1st April 2009 to 1st March 2012). Adjust the price with any dividend payments that may have been made within this period and any other capital structure changes such as bonus, rights issues or share splits. This information is available from indicated websites and industry magazines such as ‘Shares’, ‘Personal Investment’ but you may use any other publication or source of information of your choice. However, if you choose the “adjusted” price, all of the adjustments required have been done already. You needn’t bother yourself for the price adjustment.
Extract the same period data of a stock market index such as S&P/ASX 500 or S&P/ASX 300, and a risk-free rate time series such as T-bond. Convert the rate or yields to monthly rate. Calculate the average monthly rates for the data period as a proxy for the risk-free rate. However, you are allowed to assume the risk-free rate of 3% each year. You need to convert it from annual rate into monthly rate.
Part 1: Calculate monthly returns, expected monthly returns and standard deviations of monthly returns for each of the 8 stocks and a market index. Calculate correlation coefficient matrixes for each pair of 8 stocks and an index. Provide comments on your results. (10 marks)
Part 2: Calculate Beta and Alpha and Sharpe Ratio for each stock by using CAPM model. Provide analysis on risk and return for every stock with a comparison each other. Find underpriced and overpriced stocks and accordingly explain your investment decision. If the expected returns of some stocks are too low (lower than the risk free rate or negative) and thus cannot apply CAPM model, you just need to indicate it and explain your investment decision (10 marks)
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Part 3: You are going to structure a portfolio with five stocks selected from your 8 stocks. Based on the calculations and information obtained in Part 1 and Part 2, which five stocks would you prefer to include in your portfolio? Why? (You are not required to calculate expected return and risk for this portfolio) (10 marks)
criteria:
1. In doing this assignment, you are encouraged to refer to the texts, the journal articles referred in chapters and any other material that may assist you in understanding what you are doing in this assignment. Ensure that you give adequate cross references to the sources from which you have gathered information in compiling your report.
2. The criteria used in assessing and grading your assignment will include:
Appropriate collection of data and information;
Computational accuracy;
Relevance and accuracy of the interpretation/analysis of results;
Demonstration of your understanding of the underlying theory;
Appropriate analyses;
Neatness and style of report presentation/format.
Academic misconduct will be investigated and penalty applied.
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