Question 1 (15 marks)

This question relates to material covered in the Topics 1 to 3. This question addresses the 5th and 6th subject learning outcomes.

For the following numerical problems, detailed answers must be shown. This involves providing a brief description of the problems, formulae used, progressive and final answers to the questions. For assignments you are expected to show your workings using the appropriate formula.

a. Sandy expects to receive the following stream of cash flows from an investment over the next 5 years:

 End of year Cash flow (\$) 1 400 2 800 3 500 4 400 5 300

If the relevant rate of interest is 9% per annum on this investment, how much should she pay for this investment opportunity? (4 marks)

b. Lee has taken out a loan of \$100,000 with an interest rate of 10% per annum. The loan is to be paid off by 20 equal quarterly payments; the first payment is due today. How much will Lee’s quarterly payment be?. (4 marks)

c. Dianne won a lottery prize of \$200,000. She invested the entire amount and expects a yearly return of 10% per annum compounded monthly on her investment. Dianne will receive 150 equal monthly payments with the first payment due to be paid to her in exactly 2 years. Find the size of the monthly payments that Dianne will receive. (7 marks)

Question 2 (15 marks)

This question relates to material covered in the Topics 1 to 3. This question addresses the 5th and 6th subject learning outcomes.

Following is an example of a cash flow timeline developed using the Table Function within MS Word. Please use this example as a means to develop a similar timeline in your answer to the following question.

Example only:

 % 5% 6.5% Year 0 1 2 3 CFi \$0 \$1,000 \$1,000 \$1,000

Below are the expected cash flows and interest rates expected from an investment over the next ten years. Cash flows will occur at the end of the nominated years.

 Cash Flows Interest Rates Year 0 Years 1 – 2 8% Year 1 Year 2 +\$ 6,500 Year 3 +\$ 1,500 Years 3 – 8 6% Year 4 Year 5 Year 6 -\$ 2,500 Year 7 Year 8 Year 9 +\$ 10,000 Years 9 – 10 7% Year 10

1. Using the Table function within MS Word, draw a time line showing the above cash flows and interest rates (following the example above) (6 marks).
2. What will be the value of all these cash flows at each of the following times: (9 marks)
• Time1
• Time5
• Time10

Question 4 (50 marks)

This question relates to material covered in Topics 1-5. This question addresses the 1st, 2nd and 3rd subject learning outcomes.

1. Find the monthly holding period returns for 2016 for National Australia Bank (NAB), BHP Billiton (BHP) and the market (MKT) as proxied by the All Ordinaries index. 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). Using Excel, graph your % return results on one graph with returns on the y axis and time on the x axis to enable comparison between options. (Use ‘Close’ rather than ‘Adjusted Close’ for the selling price.) Note: Opening price MUST equal previous month closing price (12 marks).
2. For each investment, what is the average monthly holding period return? (4 marks)
3. For each investment, what is the annual holding period return? (4 marks)
4. Calculate the standard deviation of the monthly rates of return for each share and the market (9 marks).
5. Using Excel plot your results from (iii) and (iv) above with risk on the x axis and return on the y axis (3 marks).
6. If the 10 year government bond rate is 2.95% and the long term return on the market is 6.5%, assuming the beta (β) for NAB is 1.23 and for BHP is 0.90, use the Capital Asset Pricing Model (CAPM) to find the expected returns for NAB and BHP (4 marks).
7. Construct and graph the Security Market Line (SML) showing where NAB and BHP lie (5 marks).
8. Based on your findings construct a portfolio made up of 30% CBA and 70% RIO. Calculate the estimated return and β for this portfolio (4 marks).
9. Based on your understanding of the CAPM and the SML, which of these asset(s) or portfolio(s) would you invest in and which would you not invest in. Explain your choice (5 marks).

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