FINANCE

Managerial Finance



Managerial Finance

Answer 1

Calculation of the average monthly holding period (HPR) of Market Index, Bell Ltd. & Coffee Bean Ltd. is given below:

Average Monthly Holding Period Return

Months

Market index (points)

Bell Ltd ($)

Coffee Bean Ltd ($)

June - May 10

0.039

0.126

0.113

July - June 10

-0.012

0.170

-0.216

Aug - July 10

-0.146

-0.079

-0.246

Sept - Aug 10

0.062

0.315

0.146

Oct - Sept 10

0.080

-0.004

0.199

Nov - Oct 10

0.059

-0.071

0.063

Dec - Nov 10

0.056

0.203

0.217

Jan 11 - Dec 10

0.041

0.366

-0.072

Feb - Jan 11

0.003

-0.199

0.016

Mar - Feb 11

0.002

0.020

0.061

Apr - Mar 11

0.038

0.008

0.316

May - Apr 11

-0.025

-0.164

-0.002

Jun - May 11

0.054

0.074

0.018

July - June 11

-0.032

0.105

-0.381

Aug - July 11

-0.006

0.194

-0.016

Sept - Aug 11

-0.029

-0.143

0.083

Oct - Sept 11

0.063

-0.040

0.097

Nov - Oct 11

0.019

0.072

-0.023

Dec - Nov 11

0.058

0.186

-0.087

Jan 12 - Dec 11

-0.051

-0.246

0.320

Feb - Jan 12

-0.020

0.062

0.098

Mar - Feb 12

0.097

0.322

0.276

Apr - Mar 12

-0.031

-0.071

-0.325

May - Apr 12

-0.022

-0.140

0.125

Average HPR

1.248%

4.442%

3.248%

Now in order to calculate the monthly standard deviation of these returns of the three that is Market Index, Bell Ltd. & Coffee Bean Ltd. the formula for standard deviation is as follows:

Market index (points)

Bell Ltd ($)

Coffee Bean Ltd ($)

Mean

1286

39

28

Monthly Standard Deviation

Months

Market index (points)

Bell Ltd ($)

Coffee Bean Ltd ($)

June

23163.064

259.787

1.568

July

27345.308

148.058

49.450

August

108079.302

205.003

148.647

September

72374.002

41.447

97.656

October

35105.331

43.138

39.465

November

14982.780

79.351

24.129

December

3226.713

7.442

0.008

Jan-11

40.885

114.107

3.772

February

7.313

0.551

2.347

March

0.113

2.440

0.008

April

2415.313

3.505

80.424

May

249.824

23.794

79.351

June

7512.700

5.373

91.928

July

1822.080

2.440

22.298

August

1181.698

90.100

25.929

September

11.050

6.210

10.189

October

5912.969

0.659

0.612

November

10583.437

13.558

1.994

December

33568.042

136.471

13.854

Jan-12

11756.161

0.771

16.224

February

6461.882

2.226

51.236

March

45175.731

213.805

283.515

April

27687.573

116.901

5.098

May

18107.964

14.532

36.336

SUM

456771.237

1531.668

1086.036

S.D.

137.957

7.989

6.727

Answer 2

A share price index is based on the present market price of some group of shares that are listed on the stock exchange for example, FTSE 100 index. It measures movement in the price of shares. Investors find stock records functional as a route to judge the generally speaking state of the economy, or of a specific area of the economy. If economic growth is strong (or at least that indicators show it is likely to improve), an index will rise (which is called a bull market). Declining economic conditions or falling corporate benefits almost always make lists fall (a bear business).

Answer 3

In this part we will calculate the expected return and standard deviation of Bell Ltd. & Coffee Bean Ltd. shares that is a two asset portfolio. The weights has been assigned to both the portfolios / shares on an assumption of 50 - 50 %. This means that w1 (weight one) is equal to 50 % and w2 (weight two) is also equal to 50 %.

The expected return is calculated as follows:

Formula: E ( R ) = w1R1 + w2 R2 + … + wn Rn

Expected Return

Months

Bell Ltd ($)

Coffee Bean Ltd ($)

July - June 10

0.170

-0.216

Aug - July 10

-0.079

-0.246

Sept - Aug 10

0.315

0.146

Oct - Sept 10

-0.004

0.199

Nov - Oct 10

-0.071

0.063

Dec - Nov 10

0.203

0.217

Jan 11 - Dec 10

0.366

-0.072

Feb - Jan 11

-0.199

0.016

Mar - Feb 11

0.020

0.061

Apr - Mar 11

0.008

0.316

May - Apr 11

-0.164

-0.002

Jun - May 11

0.074

0.018

July - June 11

0.105

-0.381

Aug - July 11

0.194

-0.016

Sept - Aug 11

-0.143

0.083

Oct - Sept 11

-0.040

0.097

Nov - Oct 11

0.072

-0.023

Dec - Nov 11

0.186

-0.087

Jan 12 - Dec 11

-0.246

0.320

Feb - Jan 12

0.062

0.098

Mar - Feb 12

0.322

0.276

Apr - Mar 12

-0.071

-0.325

May - Apr 12

-0.140

0.125

Expected Return

0.470

0.333

Expected Return

80%

Standard Deviation of the two asset portfolio is calculated as follows:

Formula:

In order to calculate the standard deviation of a two asset portfolio, we first have to calculate the covariance of the two portfolios. The covariance formula is given below:

Covariancea,b = 

Average Returns

0.041

0.029

Covariance

Months

Bell Ltd ($) (Ra - Avg Ra)

Coffee Bean Ltd ($) (Rb - Avg Rb)

(Ra - Avg Ra)*(Rb - Avg Rb)

July - June ...