International Investment and Risk
MACQUARIE UNIVERSITY Faculty of Business and Economics AFIN828 International Investment and Risk Assignment Semester 1 / 2013
1) Using the price series provided in the spreadsheet assignment_data.xls calculate the monthly returns for Westpac (WBK), Wesfarmers (WES) and Rio Tinto (RIO) for the considered time period from January 2nd, 2012 to January 1st, 2013. (25 Marks) a) Considering a possible investment in WBK and WES, calculate the mean (monthly) return, the standard deviation of return and the coefficient of correlation between the returns. Using Excel, produce a chart showing alternative risk-return combinations in terms of 5% (e.g. 0% in WBK and 100% in WES, 5% in WBK and 95% in WES, 10% in WBK and 90% in WES, etc.) from the two investments. Interpret your results, also in comparison to investing in either of the individual stocks. Meanwhile please also calculate the minimum standard deviation of the portfolio contains these two stocks via EXCEL SOLVER. b) Now assume that an investor is interested in combining all three stocks into an optimal portfolio. Using a spreadsheet and the Excel Solver Tool, calculate the optimal weights for each of the investments such that they maximize the expected portfolio return for a given standard deviation of portfolio return (assume that the individual weights have to be positive or zero, so no short-selling is allowed). Provide the expected returns and individual weights of the optimal portfolio with a standard deviation of 6% and 6.5%. c) Provide a plot that contains several alternative risk-return combinations for the optimal three asset portfolios. Also plot the efficient frontier. Interpret your results in comparison to the two asset case in a).
2) Assume that on 1/8/2012, when the WBK share price was S= AUD 22.5 a trader has sold 200,000 European WBK call options with strike price K=25 and expiration date 1/11/2012. Suppose that the amount received for the options was AUD 200,000. Further assume that the yearly
1) Using the price series provided in the spreadsheet assignment_data.xls calculate the monthly returns for Westpac (WBK), Wesfarmers (WES) and Rio Tinto (RIO) for the considered time period from January 2nd, 2012 to January 1st, 2013. (25 Marks) a) Considering a possible investment in WBK and WES, calculate the mean (monthly) return, the standard deviation of return and the coefficient of correlation between the returns. Using Excel, produce a chart showing alternative risk-return combinations in terms of 5% (e.g. 0% in WBK and 100% in WES, 5% in WBK and 95% in WES, 10% in WBK and 90% in WES, etc.) from the two investments. Interpret your results, also in comparison to investing in either of the individual stocks. Meanwhile please also calculate the minimum standard deviation of the portfolio contains these two stocks via EXCEL SOLVER. b) Now assume that an investor is interested in combining all three stocks into an optimal portfolio. Using a spreadsheet and the Excel Solver Tool, calculate the optimal weights for each of the investments such that they maximize the expected portfolio return for a given standard deviation of portfolio return (assume that the individual weights have to be positive or zero, so no short-selling is allowed). Provide the expected returns and individual weights of the optimal portfolio with a standard deviation of 6% and 6.5%. c) Provide a plot that contains several alternative risk-return combinations for the optimal three asset portfolios. Also plot the efficient frontier. Interpret your results in comparison to the two asset case in a).
2) Assume that on 1/8/2012, when the WBK share price was S= AUD 22.5 a trader has sold 200,000 European WBK call options with strike price K=25 and expiration date 1/11/2012. Suppose that the amount received for the options was AUD 200,000. Further assume that the yearly