**Question 1 **

You are considering investing in Australian shares and decide to investigate the shares of two Australian companies: BHP Billiton Limited and Telstra Corporation Limited.

The monthly holding period return is the percentage return (%) you would receive if you bought an asset on the first day of the month (opening price) and sold it on the last day of the month (closing price). (Use ‘Close’ rather than ‘Adjusted Close’ for the selling price and **include**any dividends). I have provided this in the spreadsheet attachment.

This question is to be done on a spreadsheet with the results pasted and submitted in a Word document. Make sure that you show all your workings – for example, do not simply put down the covariance but show how it was obtained and this does not mean giving the Excel algorithm. Please do not give cell formulae, cell references, etc, as the reader should be able to follow from a table. Likewise do not use any excel formula to calculate standard deviation, covariance etc. It will not be acceptable.

a) Find the monthly opening and closing prices for the period 1 January 2018 – 31 December 2018 for BHP Limited (BHP.AX), and Telstra Corp. Ltd (TLS.AX). Using the monthly holding period returns (%) for the period 1 January 2018 – 31 December 2018 for both shares construct the minimum variance portfolio (MVP) comprising of only BHP and TLS and calculate the risk (standard deviation) and return of this minimum variance portfolio. (Hint: to construct MVP you need standard deviations of both shares and covariance between the shares. To calculate return of MVP you need annual holding period returns of the shares.

b) Plot the efficient frontier of this two security universe (BHP and TLS) on a graph, include all data in a separate table and explain this graph.

c) If you are an investor with risk aversion factor A = 2 based on the utility function, which specific portfolio on the efficient frontier (that you calculated in part b) would you prefer most? Calculate using the appropriate formula and explain why.

d) If the average T bill rates in 2018 were 2.5% pa., what would be the expected return and standard deviation of an optimal risky portfolio comprising of BHP and TLS?

e) What would be the slope of the Capital Asset Line of this optimal risky portfolio?

f) As an investor with risk aversion factor A = 2 what would be the expected return and standard deviation of your optimal complete portfolio comprising the optimal risky portfolio (calculated in part d) and T bills?

**Question 2**

- What are the advantages of the index model compared to the Markowitz procedures for obtaining an efficient portfolio? What the disadvantages? (maximum 150 words).
- What is the basic trade-off when departing from pure indexing in favour of an actively managed portfolio? (maximum 100 words)
- Two investment advisors are comparing investment performances. One averaged an 18% rate of return and the other a 15% rate of return. The beta of the first investor was 1.4, whereas the beta of the second investor was 0.99.

a) From this information, can you determine which investor was a better selector of individual stocks (aside from the issue of general movement in the market)?

b) If the T-Bill rate was 5% and the market return was during the period was 13.5%, which investor would be considered the superior stock selector?

c) What if the T-Bill was 3% and the market returns was 15%?

Attachments:

Trans.docxTrans-Data.xlsx