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Finance: Capital asset valuation.

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Please Explain How to obtain Results Step by Step

a. Find the monthly holding period returns for the period 1 January 2009 - 31 December 2009 for Quarry Products, BJs Export and the market (MKT) as proxied by the All Ordinaries index (find data attached). The monthly holding period return is the 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). Graph your results on one graph with returns on the y axis and time on the x axis. (Use 'Close' rather than 'Adjusted Close' for the selling price. Ignore any dividends.)

b. For Quarry Products, BJs Export and MKT:
i. What is the average monthly holding period return?
ii. What is the annual holding period return?
iii. Calculate the standard deviation of the monthly rates of return.
iv. Plot your results from (ii) and (iii) above with risk on the x axis and return on the y axis.
v. Which asset(s) would you invest in and which asset(s) would you not invest in. Explain your choice.

c. i. If the long term government bond rate is 5.3% and the long term market premium is 5%, the betas (?) for Quarry Products and BJs Export are 1.08 and 0.84 respectively, using the Capital Asset Pricing Model (CAPM) find the expected returns for Quarry Products, BJs Export and MKT.
ii. Construct the Security Market Line (SML) showing where Quarry Products, BJs Export and MKT lie.
iii. Considering the returns as determined by the CAPM in (c)(i), and given your results in (b) explain why Quarry Products and BJs Export appear to be overpriced, underpriced or correctly priced.

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Solution Summary

The problem set deal with topics under finance: Beta, standard deviation, holding period return etc.

Solution provided by:
Chidi Ngene, M. Sc.
Education
  • B. Sc., University of Nigeria
  • M. Sc., London South Bank University
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