ASSIGNMENT DATA

Assignment Data

Assignment Data

QUESTION 1(80 marks)

(i) Calculate the monthly holding period total returns for Telstra Corporation Limited (TLS) and the All Ordinaries Accumulation Index (XAO_A) over the six year period July 2003 to June 2009 (n = 72).

Month

Year

Price

Dividend

AOI

Risk

Holding

Telstra

(cents)

Accumulation

Free

Period

TLS

Index

Rate

Return

Jun

2003

4.40

15818

0.0040

Jul

4.68

16389

0.0040

3725.05

Aug

5.02

16964

0.0040

3625.13

Sep

4.74

16941

0.0040

3374.42

Oct

4.74

0.120

17530

0.0041

3698.31

Nov

4.93

17156

0.0043

3619.60

Dec

4.82

17787

0.0045

3607.80

Jan

2004

4.92

17668

0.0045

3665.66

Feb

4.78

18218

0.0046

3702.71

Mar

4.54

18581

0.0045

3887.00

Apr

4.78

0.130

18557

0.0045

4087.68

May

4.69

18857

0.0045

3944.89

Jun

5.03

19356

0.0045

4127.42

Jul

4.93

19467

0.0045

3870.08

Aug

4.80

19671

0.0045

3989.93

Sep

4.65

20413

0.0045

4252.56

Oct

4.67

0.130

21054

0.0045

4527.76

Nov

4.93

22029

0.0045

4717.39

Dec

4.91

22690

0.0045

4602.41

Jan

2005

4.94

22992

0.0045

4682.72

Feb

5.26

23405

0.0047

4738.17

Mar

5.09

23231

0.0048

4416.37

Apr

4.84

0.200

22352

0.0047

4391.11

May

5.02

23223

0.0047

4798.32

Jun

5.06

24146

0.0047

4810.00

Jul

5.07

24814

0.0047

4903.96

Aug

4.68

25354

0.0047

5000.40

Sep

4.07

26559

0.0047

5674.39

Oct

4.21

0.200

25542

0.0047

6275.82

Nov

3.85

26665

0.0047

6333.37

Dec

3.93

27136

0.0047

7048.39

Jan

2006

3.98

28477

0.0047

7246.11

Feb

3.85

28676

0.0047

7204.90

Mar

3.74

0.200

30054

0.0047

7806.12

Apr

3.94

30777

0.0048

8229.34

May

3.71

29442

0.0049

7472.36

Jun

3.68

29989

0.0049

8083.26

Jul

3.82

29535

0.0051

8025.96

Aug

3.60

30472

0.0051

7976.74

Sep

3.71

0.140

30853

0.0051

8570.39

Oct

3.96

32335

0.0052

8715.88

Nov

3.77

33135

0.0053

8367.23

Dec

4.14

34334

0.0053

9107.53

Jan

2007

4.24

35026

0.0053

8460.49

Feb

4.26

35584

0.0053

8392.47

Mar

4.66

0.14

36767

0.0054

8631.15

Apr

4.67

37887

0.0053

8130.27

May

4.86

39096

0.0053

8371.92

Jun

4.59

39070

0.0053

8038.82

Jul

4.6

38311

0.0054

8346.63

Aug

4.37

38961

0.0057

8469.55

Sep

4.36

0.14

41212

0.0056

9430.65

Oct

4.68

42478

0.0057

9742.98

Nov

4.67

41478

0.0058

8862.81

Dec

4.69

40498

0.0059

8671.97

Jan

2008

4.34

35943

0.0060

7663.40

Feb

4.87

36037

0.0063

8303.99

Mar

4.4

34555

0.0064

7095.01

Apr

4.56

0.14

36259

0.0063

8240.84

May

4.75

37046

0.0062

8124.31

Jun

4.24

34336

0.0063

7228.12

Jul

4.5

32539

0.0063

7674.55

Aug

4.35

33849

0.0060

7521.85

Sep

4.18

0.14

30254

0.0059

6954.77

Oct

4.12

26042

0.0049

6230.08

Nov

4.06

24162

0.0038

5864.50

Dec

3.83

24143

0.0036

5946.32

Jan

2009

3.79

22949

0.0031

5991.87

Feb

3.55

21971

0.0026

5796.86

Mar

3.21

23740

0.0026

6686.98

Apr

3.33

0.14

25181

0.0026

7844.67

May

3.11

25723

0.0026

7724.40

Jun

3.39

26732

0.0026

8595.78

(ii) In your own words, explain the difference between the total [arithmetic] return calculated in 1(a)(i) above and the return relative that you will use in 2(a)(i) below.

The sum of the period returns divided by the number of periods. This is the simple average return and should be contrasted with the Geometric Return. Relative return for a portfolio or asset measures the return relative to a specified benchmark return.

The relative return value is a ratio where values above one represent a period where the portfolio outperformed the benchmark and where values below one represent a period where the portfolio underperformed the benchmark. The ratio is calculated by dividing the portfolio return factor by the benchmark return factor.

Arithmetic and logarithmic returns are not equal, but are approximately equal for small returns. The difference between them is large only when percent changes are high. For example, an arithmetic return of +50% is equivalent to a logarithmic return of 40.55%, while an arithmetic return of -50% is equivalent to a logarithmic return of -69.31%.

Logarithmic returns are often used by academics in their research. The main advantage is that the continuously compounded return is symmetric, while the arithmetic return is not: positive and negative percent arithmetic returns are not equal. This means that an investment of $100 that yields an arithmetic return of 50% followed by an arithmetic return of -50% will result in $75, while an investment of $100 that yields a logarithmic return of 50% followed by an logarithmic return of -50% it will remain $100.

The concept of 'income stream' may express this more clearly. At the beginning of the year, the investor took $1,000 out of his pocket (or checking account) to invest in a CD at the bank. The money was still his, but it was no longer available for buying groceries. The investment provided a cash flow of $10.00, $10.10, $10.20 and $10.30. At the end of the year, the investor got $1,040.60 back from the bank. $1,000 was return of capital.

(i) Calculate the ex post standard deviation of TLS and XAO_A [using the monthly holding period total returns calculated in 1(a)(i) above] for the overall six year period.

As calculated, the ExPost Standard Deviation for TLS is 0.517593586 and for XAO_A is 7463.19.

(ii) In your own words, explain what the standard deviation is attempting to measure and then comment on the values you obtained in 1(b)(i).

Providing prospective clients the ability to readily ascertain a composite's ex post (historical) standard deviation as a part of the larger compliant presentation will provide valuable information about how an investment strategy has performed. When attempting to develop an optimally allocated portfolio of investments, using standard deviation as a definition of risk leads to unreliable conclusions when your objective is to avoid ...