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Q1.
Pick
any
three
companies
with
shares
currently
listed
on
the
ASX
that
have
been
trading
for
at
least
five
years.
Go
to
DatAnalysis
(accessible
via
Deakin
Library
website)
and
download
the
adjusted
month-­
end
closing
stock
prices
of
these
companies
for
the
previous
61
months
ended
31/10/2015
onto
a
MS
Excel
spreadsheet.
Use
the
downloaded
data
and
perform
necessary
calculations
to
answer
the
questions
a)
to
c):
a) Compute
the
individual
monthly
returns,
average
monthly
return,
variance
and
standard
deviation
of
the
monthly
returns
for
the
stocks
of
the
companies
you
have
chosen.
(5
marks)
b) Using
the
various
statistics
calculated
in
a),
state
which
stock
has
the
highest
return,
which
stock
has
the
highest
total
risk
and
which
one
has
the
highest
return
per
unit
of
total
risk.
(3
marks)
c) Would
the
stock
with
the
highest
total
risk
in
b)
necessarily
be
the
‘riskiest’
of
the
three
stocks?
Discuss
the
components
of
total
risk
and
circumstances
in
which
you
can
minimize
your
portfolio
risk.
(2
mark)
Go
to
Yahoo
Finance
and
download
the
adjusted
month-­end
closing
value
of
the
ASX
All
Ordinaries
Index
(AORD)
for
last
61
months
ended
31/10/2015.
Perform
necessary
calculations
to
answer
questions
d)
to
f):
d) Use
the
month-­end
adjusted
closing
values
of
the
AORD
to
compute
individual
monthly
returns
on
the
market
index.
(2
marks)
e) Briefly
describe
the
beta
estimation
process
as
per
the
CAPM.
Using
the
information
in
d)
along
with
the
individual
monthly
returns
on
each
of
the
three
stocks
calculated
in
a),
estimate
their
betas.
What
do
these
betas
tell
you
about
the
riskiness
of
these
three
stocks
relative
to
the
market?
Assuming
a
2%
p.a.
risk-­free
rate,
calculate
the
expected
return
on
each
of
the
three
stocks
using
CAPM.
(4
marks)
f) What
would
happen
to
the
expected
rates
of
return
for
a
risk-­free
rate
of
3.5%
per
annum?
What
would
they
be
if
the
risk-­free
rate
was
1.5%?
Explain
your
observations
in
light
of
the
risk-­return
relationship.
(4
marks)
Q2.
The
application
of
the
CAPM
in
modern
financial
markets
has
been
much
debated
and
criticized
from
an
empirical
point
of
view.
Does
this
imply
that
the
theory
underlying
CAPM
is
flawed?
Outline
your
argument.
Should
we
reject
the
model
outright?
If
you
think
that
the
model
should
be
rejected,
provide
alternative
model(s)
to
replace
it
with
empirical
studies
to
support
your
choice.
Otherwise,
provide
the
reasons
why
CAPM
should
be
kept.
(Maximum
1000
words
for
Q2)



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