ASSESSMENT QUESTION: Please answer all questions. Each question carries 20 marks
1. a) Discuss your market view on the Dow Jones Industrial Average (DJIA) for the period from Jun 2022 to Jun 2023. Make clear what your subjective probability for each of the possible market scenarios is and their corresponding returns for the index. Calculate the expected return and its standard deviation. Please note, although it is your subjective market view, you need to defend it using most recent macro-economic news, references and/or historical data analysis. Historical data are available from either Bloomberg or other internet sources (for example, https://finance.yahoo.com).
b) Compared with your market view, another analyst, Tom, holds a more pessimistic market view. He completely reduces the possibility of your most optimistic market scenario to 0% and adds this possibility to that of your most pessimistic market scenario. Discuss to what extent this possibility adjustment would affect the expected rate of return and its standard deviation.
2. Please choose a constituent company of the Dow Jones Industrial Average (DJIA) and conduct a regression analysis for your chosen company using both index model and Fama-French three factor model. Discuss the risk characteristics for this chosen company using the output of your regression analysis. Historical price data for individual shares can be collected from either Bloomberg or internet sources (for example https://finance.yahoo.com/). The DJIA is provided in Appendix A of this report and Fama-French asset pricing factors are provided in Appendix B.
3. There is a market wide concern on the rising inflation and expected interest rate hike for the coming year. One of your clients has changed his degree of risk aversion A from a low level (A=1) to a high level (A=3), with utility score function . Your client optimal risky portfolio is assumed to be DJIA index portfolio. Based on your market view from question 1, if interest rate is to be adjusted from 0.1% per year to 0.5% per year, discuss your changed optimal weight allocation into the optimal risky portfolio for this client. Your discussion should be supported by relevant portfolio theories and clear calculation outcomes.
4. Conduct a fundamental analysis of the chosen company in question 2. The analysis must employ a Discounted Cash Flow Model (DCF) valuation approach.
a) You are required to demonstrate the forecasting process, backed up by relevant data sources and references, for the price of this chosen share at Jun 2022 by using the variable or constant growth rate for the coming 5 years from Jun 2022 to Jun 2027, and a realistic constant growth rate assumption applied for the period beyond Jun 2027.
b) Discuss your investment recommendation for this chosen share and explain your reasoning.
5. If you are a believer that the stock market is efficient, explain why alpha generated out of an asset pricing model may not necessarily provide strong evidence against the efficient market hypothesis. Your discussions should be supported by previous empirical evidence in the literature.
INSTRUCTIONS
- Your report must provide answers for all five questions. Each question carries 20 points. The total points for the report are 100. This report should be submitted via Online submission point in Canvas. For submission deadline, please refer to the submission point in Canvas.
- The real world is complicated and it is difficult, in practice, to determine the appropriate market view, expected rate of return, and risk. There is no definitive answer to these questions because your answer will depend on the assumptions you make and the methods you use. State your assumptions clearly and say why you make them: state your methods – which equations are you using, and why; display your working: let the marker see your thinking. Arithmetical mistakes will not be penalised (unless they result in implausible answers). Think about your answer – does it seem plausible?
- You are expected to demonstrate evidence of a wide background of reading and research. All references should be acknowledged (see Library handout on reference styles – Harvard approach is strongly recommended). Good standards of written English and presentation are expected and marks will be deducted if such standards are not met.
- There are three appendices at the end of this report. Appendix A is the list of companies in the Dow Jones Industrial Average (DJIA) Index, from which you are required to choose your individual share. Appendix B provides the Fama-French three factors, extracted from https://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html, which also provides a downloadable dataset. Appendix C includes the marking rubrics where you can find criteria used for marking your report.
- The report should be no more than 2,000 words (+/- 10%) excluding the reference page(s), bibliography and appendices (if applicable). Marks will be deducted for excessively short or lengthy reports. A word count should be clearly displayed at the end of the report.
- “Plagiarism is the practice of presenting thoughts, writings or other output of another or others as original, without acknowledgement of their source(s).” All material used to support a piece of work, whether a printed publication or from electronic media, should be appropriately identified and referenced and should not normally be copied directly unless as an acknowledged quote. Text translated into the words of the individual student should in all cases acknowledge the source. For further information please see: http://www.sussex.ac.uk/s3/?id=35&jquery=off
Before submitting the report, you must ensure that: any material that has been identified as originally from a previously published source has been properly attributed by the inclusion of an appropriate reference in the text; direct quotations are marked as such (using “quotation marks” at the beginning and end of the selected text); and citations are included in the list of references.
