Q1. Portfolio Valuation – General & Practical

In Assessment 1, you have used Yahoo7!Finance to determine holding period returns for BHP Billiton Ltd and Commonwealth Bank of Australia. In this assessment, you will gain further experience of using the resource.

Assume that you are acting as financial analyst for a firm. You have been assigned $100k by your supervisor. Your task is to develop a portfolio consisting of shares from three companies - BHP Billiton Ltd (symbol: BHP.AX), Commonwealth Bank of Australia (symbol: CBA.AX), and Myer Holdings Ltd (symbol: MYR.AX). As part of this task, you note the closing prices of these shares on 1 Dec 2014 and 1 Dec 2015. You presume that the expected return of these shares are the same as holding period return of these shares over the period 1 Dec 2014 – 1 Dec 2015 (the holding period returns are to be calculated based upon closing prices at these two dates and dividends attained between these two dates).

You are considering the following investment choices.

Investment Choice Percentage of $100k invested in BHP.AX Percentage of $100k invested in CBA.AX Percentage of $100k invested in MYR.AX

A 15% 80% 5%

B 10% 80% 10%

C 5% 80% 15%

(a) Given the information and presuming expected return of the portfolio as the selection criteria, which of the above investment choices will you adopt? [6 marks]

(b) Suppose, you are also given the following (hypothetical) information:

Share β

BHP.AX 1.10

CBA.AX 0.85

MYR.AX 2.00

If you are risk averse, will your investment choice change due to the above-indicated information for β? Why or why not? [4 marks]

[Hint: Please note that this is not a CAPM question. Please note the varied portfolio relevant calculations in the book and week 3 materials, and also consider what beta means]

Q2. Bond Valuation - General

Suppose an investor is considering investment in the following three bonds:

Bond A:

This coupon bond has a face value of $1000 and coupon of 4.5% paid semi-annually. The bond matures in 10 years.

Bond B:

This is another coupon bond, which also has a face value of $1000 and coupon of 4.5% paid semi-annually. However, it matures in 20 years.

Bond C:

This is a zero-coupon bond, which also has a face value of $1000. It matures in 10 years. Interest is compounded semi-annually.

Suppose, the investor evaluates the bonds for the following sets of market interest rates (i.e., i in the Bond formula):

3.5%

4.5%

6.5%

10.0%

Given the above information:

Discuss how the prices for these bonds change with the market interest rate. In your discussion, also indicate whether there is any difference between the bonds in respect to these changes of price. Further, indicate how the changes in market interest rate may relate to the investor’s investment decision. (15 marks)

[NOTE and INSTRUCTION: You are to determine prices of the bonds for each of the different market interest rates, and then discuss. For discussions, you are to cite at least 3 relevant references including the textbook. The