Finance

FIN3160 Coursework 2019-20

Introduction

The assignment comprises three tasks. Please read them very carefully in order to establish exactly what is being asked. The stages are interrelated with results feeding into subsequent elements. Hence, it is especially important that you stay close to the brief for each element.

The submission deadline is midnight 20th March 2020. Submission should be by upload to ‘Assignment Submission’ on Moodle. There will be a separate submission facility for the supporting spreadsheets. Please ensure that you submit both components by the deadline.

Relevant results from the spreadsheet should be incorporated into the main Word document with suitable presentation adjustments designed to highlight the results you believe noteworthy. Please avoid simply transferring the entire mass of Excel data output into the main document or adopting instructions such as ‘please see Excel spreadsheet’. The work itself offers 95 out of a passible 100 marks. The other 5 marks are dependent on the standard of presentation.

It is advisable to clearly indicate and headline your work on each task – 1a, 1b…. This will help you to organize the work (and make it easier to mark).

The work requires commentary at each stage. However, avoid extended essays about CAPM, the effects of asset diversification and so on that address the issue at the level of generalities. Keep the commentary pertinent to the results being analysed. In general, a paragraph of so should suffice.

The coursework tests your knowledge of the module subject-matter from topics 11-18 (see the Learning planner on page 15 of the module handbook). It accounts for 40% of the overall module assessment and should be submitted as an individual endeavour.

Data

The accompanying Excel file contains the following data:

• Opening share prices for four companies on the first each month, covering a period from 1st January 2017 to 1st January 2020.

• Values for the FTSE All-Share Index. The data consists of opening index levels on the first day of each month covering a period from 1st January 2017 to 1st January 2020.

• Annual dividend payments for each company for the three years from January 2017 to January 2020, together with the dividend yield for the FTSE All-Share index over the same period.

Task 1: Individual Asset and Portfolio Risk

Measure the risk of each share based on the three years of monthly share price data. Your approach should be based on the following guidelines:

a. Use the FTSE All-Share Index as a proxy for the market portfolio and regress the individual company monthly log-normal returns against the monthly FTSE-Index log-normal returns.
(10 marks)

b. Using the information from the regressions, analyse the risk associated with each share over the period. Your discussion should focus on the total risk and its division into systematic (market) risk and non-systematic (unique) risk. It should also use the beta values to characterise the scale of each company’s level of systematic risk.
(10 marks)

c. Assume a four-asset, equally weighted, portfolio and calculate the portfolio systematic, non-systematic and total risk. Compare the portfolio risk with the scale of risk associated with the individual assets, with a view to assessing the scale of the risk reduction arising from asset diversification.
(10 marks)

Note that the resulting risk measurements will be monthly variances and standard deviations. You will want to annualise these when commenting on the risk associated with annual returns.

Task 2: Individual Shares’ Actual, Expected and Abnormal Returns

Assess how each share performed individually over the three years to 1st January 2020. The exercise should comprise the following elements:

a. Calculate the actual annual holding period returns for each share over the period from 1st January 2017 to 1st January 2020.
• Include the company dividend payments as part of the holding period return. (15 per cent)
(10 marks)

b. Use the Capital Asset Pricing Model to calculate the expected annual return on each share over the period from 1st January 2017 to 1st January 2020. You need to:

• Establish an annual risk-free return for use in the model. (A single risk-free return applied to all three years is fine). Briefly outline your reasoning behind the chosen risk-free rate.
• Calculate the actual annual returns on the FTSE All-Share Index to use as market return in the CAPM calculations of expected asset returns
• Incorporate the FTSE All-Share dividend yields into the measures of annual market returns
(10 per cent)

c. Analyse the differences between expected and actual returns for the individual securities. You should:

• Calculate the annual abnormal returns for each share
• Link the differences between expected and abnormal returns to the risk analysis in Task 1
(10 per cent)
Task 3: Portfolio Actual, Expected and Abnormal Returns

Assume an equally-weighted portfolio of the four shares and outline how it performed over the three years to 1st January 2020. The exercise should comprise the following elements:

a. Calculate the actual annual holding period returns for the portfolio from 1st January 2017 to 1st January 2020
(5 marks)

b. Use the Capital Asset Pricing Model to calculate the expected annual return on the portfolio
(5 marks)

c. Analyse the differences between expected and actual annual returns for the portfolio
(10 marks)

d. In the light of the earlier presentation of the portfolio risk, analyse the differences between the scale of abnormal returns on the individual shares and abnormal returns for the portfolio as a whole
(15 per cent)