Subject Code : FINC2011
FINC2011 - Corporate Finance - WhiteRock - Capital Asset Pricing Model CAPM - Finance Assessment Answer
Assessment Task:

Task

You are starting an internship at a large investment fund called “WhiteRock”. Your manager has tasked you to write a report for a client that compares the potential return and risk profiles of different investment opportunities. Given the uncertainty with current financial markets, this client is considering investing only for the medium term (approximately 5 years). The investment fund is thinking about whether a well-diversified or limited diversification strategy would be preferable for this client. You expect that extra returns could be generated as compensation for bearing more risk. 

Required:

1. Select two stocks and an appropriate market index from the Australian Securities Exchange (ASX), London Stock Exchange (LSE) or New York Stock Exchange (NYSE). The two stocks will form the limited diversification portfolio and the market index will be the diversified portfolio. Justify why these two stocks are appropriate choices to combine together and your choice of a relevant market index.

2. Estimate and compare the returns and standard deviation of each stock and the market index over an appropriate time period. Justify your data choices.

3. Calculate the beta of each of the two stocks. Justify your data choices.

4. Calculate the expected return of each stock using the Capital Asset Pricing Model (CAPM). Justify your data choices.

5. Construct a series of limited diversification portfolios with the two chosen stocks by varying the weights of each at 2.5% increments – starting at 100% invested in Stock X and then increasing the weight of Stock Y until it reaches 100%. Calculate the expected return and beta of each portfolio. The results should be presented on an appropriate graph.

6. Provide a final recommendation to this client on the most appropriate choice(s) that they should invest in and how it could be implemented most optimally. 

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  • Uploaded By : Mitchell Lee
  • Posted on : October 26th, 2018

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