Reference no: EM13936609

QUESTION 1:

a. What are the three most important determinants of the price of a bond? Describe the effect of each on the price of a bond.

b. Explain the meaning of bond ratings. What are the implications of bond ratings for potential investors?

c. What are Exchange-traded Australian Government Bonds? Are there any risks associated with these bonds?

QUESTION 2

TABLE 1 (below) includes price data on the ASX All Ordinaries Index, Wesfarmers Limited (which owns Coles) and Woolworths Limited from years 2005 to 2015:

TABLE 1: (Source: https://au.finance.yahoo.com)

Year     All Ordinaries      Wesfarmers       Woolworths       Market        Wesfarmers      Woolworths
          Index (Market          Limited             Limited          Returns           Returns            Returns
 
2005         4708.8              18.9922           9.61035
2006         5461.6              21.07258        14.22607
2007          6421                23.4822          21.01378
2008         3659.3              11.60563        17.27901
2009         4882.7              21.65905        19.20301
2010         4846.9              23.41564         19.6086
2011          4111                23.08883        19.55875
2012         4664.6              30.98662        24.66703
2013         5353.1              38.93328        30.05066
2014         5388.6              38.97753        28.76203
2015         5174.3                37.06               23.1
                                                                 E(R)
                                                                 Risk

(a) Complete Table above by calculating the annual returns for the All Ordinaries Index, Wesfarmers Limited and Woolworths Limited in the first step and the expected return and risk for each in the second step. The completed table MUST be submitted with your assignment. Show ALL workings here in an appendix at the end of your assignment.

(b) Based on your results in Table 1, assess the performance of Wesfarmers and Woolworths against the market as a whole and against each other in the last ten years. Your answer should address the following issues:

(i) Briefly explain the type of business Wesfarmers and Woolworths conducts, what industry they are in and their ASX codes.

(ii) Possible reasons for the difference in Wesfarmers and Woolworths historical returns relative to each other and the market.

You may make use of other sources including newspapers, articles, books, media etc. to support your answer. Your answer should not exceed 800 words.

QUESTION 3:

You are the manager of Bollinger Managed Funds. Your company offers a number of investment

products to suit different investors. Amongst the selection they have the following three portfolios:

Your task is to answer the following questions by referring to your textbook, other finance books, the media, the internet etc.:

(a) By using the information in TABLE 2 (page 4) calculate the expected (average) return, denoted by E(R), and the risk (standard deviation), for each of the five assets as well as the three portfolios in Table 2 and include your answers in the table.

The completed table MUST be submitted with your assignment. Show ALL workings in the Appendix after the reference list. All final calculations should be correct to two decimal places (two numbers after the dot point) expressed as a percentage. The workings in the appendix may be hand-written. Do not include the workings in the appendix when submitting electronically through TURNITIN. (15 marks)

(b) Explain the meaning of correlation and how the correlation coefficient impacts the risk of a portfolio. Include in your answer the meaning of the correlation coefficients (-1.0; +1.0; and 0) given in Table for each of the three portfolios and the effect it has had on the risk. Your answer should not exceed 400 words.

(c) Discuss the meaning of diversification in finance. Discuss the impact that diversification has had on the expected return and risk for the three portfolios in Table. Your answer should not exceed 400 words.

TABLE: Historical returns

Year    Asset A     Asset B     Asset C      Asset D      Asset E      Portfolio 1    Portfolio 2     Portfolio 3
                                                                                                (A, B)         (C, D)           (A, E)
 
1995     5.81%       1.80%     18.41%       8.73%        8.04%          3.81%        13.57%        6.93%
1996     3.21%       4.40%     18.72%       8.92%        8.11%          3.81%        13.82%        5.66%
1997     7.61%       0.00%     26.58%       13.70%      5.29%          3.81%        20.14%        6.45%
1998     7.48%       0.13%     20.38%        9.93%       4.85%          3.81%        15.15%        6.17%
1999     4.21%       3.40%     4.48%         0.26%        5.05%          3.81%        2.37%         4.63%
2000     4.61%       3.00%     23.14%       11.61%       6.26%          3.81%       17.38%        5.43%
2001     7.61%       0.00%     13.40%        5.68%        5.03%          3.81%       9.54%          6.32%
2002     0.23%       7.38%     13.89%        5.98%        5.10%          3.81%       9.94%          2.67%
2003     7.61%       0.00%     8.56%          2.74%        4.65%          3.81%       5.65%          6.13%
2004     1.72%       5.89%     20.33%        9.90%        5.96%          3.81%        15.12%        3.84%
2005     5.22%       2.39%     12.57%        5.18%        5.67%          3.81%       8.88%           5.44%
2006     0.44%       7.17%     9.96%          3.59%        7.59%          3.81%       6.77%          4.02%
2007     7.39%       0.22%     9.35%          3.22%        6.60%          3.81%       6.29%          7.00%
2008     7.57%       0.04%     47.22%         26.24%      7.26%          3.81%       36.73%        7.41%
2009     2.56%       5.05%     6.73%           1.63%       3.52%           3.81%       4.18%         3.04%
2010     7.35%       0.26%     9.76%           3.47%       4.18%           3.81%       6.61%         5.77%
2011     7.45%       0.16%     23.66%         11.92%      4.76%           3.81%     17.79%         6.11%
2012     0.31%       7.30%     16.22%         7.40%        4.65%           3.81%     11.81%         2.48%
2013     7.61%       0.00%     5.39%           0.81%        2.88%           3.81%     3.10%           5.24%
2014     0.03%       7.58%    16.18%          7.38%        2.80%            3.81%    11.78%         1.42%
E(R)
Risk
                                                                             Correlation
                                                                             coefficient          -1.0           +1.0             0