Investment Management Trimester1, 2012/13

EDINBURGH NAPIER UNIVERSITY SCHOOL OF ACCOUNTING, FINANCIAL SERVICES AND LAW ASSESSMENT BRIEF 3 REPORT 1. Module Number 2. Module Title 3. Module Leader 4. Tutor with responsibility for this Assessment First point of contact 5. Assessment 6. Weighting 7. Size and/or time limits for assessment 8. Deadline of submission 9. Arrangements for submission ACC10102 Investment Management Marizah Minhat Marizah Minhat

Report 30% of module assessment 1500 words (excluding tables and bibliography)

3 December 2012. The report should be submitted to the box outside room 153 (C.lockhart). The report must be submitted together with the Coursework Submission and Feedback form and Student Declaration on Plagiarism attached herewith. You are advised to keep your own copy of the assessment on the H drive. Late submission will be penalised at the discretion of module leader.

10. Assessment Regulations

All assessments are subject to the University Regulations.

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11. The requirements for the assessment

This coursework relates to the learning outcomes of the module:

following

1. Identify factors affecting return and risk. 2. Find and interpret financial information as well as applying statistical techniques to inform investment decisions and strategies. 3. Evaluate investment performance by applying different measures and techniques. Students are provided with some information in the Question Booklet attached herewith which is downloadable from the modules Moodle. Each student is required to write a report individually addressing the questions in the Question Booklet. The report should adopt the format attached at the end of the Question Booklet. Students are required to learn how to use FAME (Financial Analysis Made Easy) database to extract the required financial information. Other reliable sources (e.g. annual reports, financial press, academic journal articles and websites) should be used to support arguments and should be properly referenced. List of references must be provided at the end of the report. For calculations, please provide formulas and answers up to three decimal places only. You may find it useful to use Microsoft Excel functions to expedite your calculations.

12. Special instructions

Please ask your tutor if you are unsure of the detail or requirements. Written feedback should be distributed within three weeks after the submission date. Marks are allocated for each section as attached in the following page.

13. Return of work

14. Assessment criteria

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Napier University Business School Report Assessment Form School of Accounting, Financial Services and Law Investment Management (ACC10102) M MINHAT R HOLMES Trimester 1 2012/13 Students Matriculation Number:

Sections grade and mark

Section (weight)

Fail 0-39%

Weak 4049%

Satisf. 5059%

Good 6069%

Excel. 70100%

Weight Mark (%)

1. Risky securities (30%)

2. Hedging (20%)

3. Minimum-variance portfolios (50%)

Weighted Average Mark ______ % Comments:-

Investment Management Trimester1, 2012/13

EDINBURGH NAPIER UNIVERSITY

SCHOOL OF ACCOUNTING, FINANCIAL SERVICES AND LAW STUDENT DECLARATION ON PLAGIARISM Plagiarism is the publication, as ones own, of the ideas, or the expression of the ideas, of another (Oxford English Dictionary). Some dictionaries use the term stealing. Plagiarism is not permitted in assessments at Edinburgh Napier University. Student Disciplinary Regulations (SDR) 11.2 categorises plagiarism as Academic Misconduct. Major examples of plagiarism include the following copying from another student, copying large sections, from an academic or other source (e.g. book, internet article), without acknowledging that source Minor examples of plagiarism include Paraphrasing without acknowledgment Quoting original reference obtained from a textbook but not reading original material OK NOT OK Quoting a relevant passage from a book, if the Copying from textbooks or articles and reference is given e.g. Drury C, (2004), failing to acknowledge the source even if Management and Cost Accounting, 6e, London, the words/sentences are rearranged. Thomson. The reference must be clearly linked to the body of your work by putting the Authors name and date in brackets. Comparing different authors ideas, with Copying from other students even if the acknowledgement of source, and making your own words and/or sentences are rearranged. comments. Doing research with others in the library but writing Allowing another student to copy your work your essay alone. When citing from the WWW give the entire URL, URL of home page alone and /or no date the date of access and author if possible, not just e.g. www.napier.ac.uk the URL of the home page e.g. http://nulis.napier.ac.uk/studyskills/#Plagiarism Procedure if Plagiarism Identified If a case of plagiarism is suspected (SDR 14.2): The member of staff marking the work will seek a second opinion from another member of the teaching team and, if suspicion is upheld, report the matter to the School Academic Conduct Officer (ACO). If the case is considered minor, a range of sanctions may be applied, including reduction of the assessment mark. If the case is major, the matter will be referred to a School Disciplinary Committee, who will consider application of a broader range of more rigorous sanctions which range from a nil mark for plagiarised assessment and hence failure in module to rustication.
I declare that I have read, and understand the above, and that the attached piece of work for ACC10102 is my own work and is free from plagiarism as defined above.

(Do not insert name) Matric No: ___________________________________ Date __________

Investment Management Trimester1, 2012/13

EDINBURGH NAPIER UNIVERSITY SCHOOL OF ACCOUNTING, FINANCIAL SERVICES AND LAW INVESTMENT MANAGEMENT (ACC10102)

QUESTION BOOKLET Please read the instructions carefully. You are a research analyst at Mubarak Investment Services firm. You have been asked to prepare a report proposing which portfolio is more suitable for your clients with low risk tolerance and investment horizon of 5-7 years. Assume no transaction costs. Question 1 - Risky securities The equity securities under your consideration are: Sainsbury is J Sainsbury PLC (Reg. no: 00185647). The principal activities of this company are grocery and related retailing. BAT is British American Tobacco PLC (Reg. no: 03407696). The company involves in the manufacture, distribution and sale of tobacco products. GSK is Glaxosmithkline PLC (Reg. no: 03888792). It is a research-based pharmaceutical group engaged in anti-infectives, central nervous system (CNS), respiratory & gastro-intestinal/metabolic areas, vaccines, oncology products, medicines, oral care products and nutritional healthcare drinks. (Source: FAME) Required: In preparing the report, you should consider both the risk and return of each security. Therefore, your report should include the following: a) Calculations of the monthly rate of returns for each security, namely, Sainsbury, BAT and GSK Your calculations should be using the monthly closing stock prices from August 2004 to July 2011 published in FAME. The figures in FAME have been adjusted based on the stock split/dividend ratio. The formula for monthly rate of return is given by Where r is the rate of return, P is the closing price, t denotes the current month and t-1 denotes the previous month. You can use Microsoft Excel functions to expedite your calculations. Please show answers up to three decimal places only. (25 marks)

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b) Based on your calculations in (a), calculate for each security: i. Average monthly rate of returns (Note: You can assume each monthly return for each security has equal chance of occurring). ii. Standard deviation of monthly returns. (You can use Microsoft Excel functions to expedite your calculations. Please show answers up to three decimal places only). (24 marks) c) By referring to reliable sources (e.g. historical data, annual reports, financial press or journal articles), identify and critically discuss: i. ii. One major source of risk facing each security. One major upside potential of each security. (51 marks) (Total: 100 marks)

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Question 2 Hedging with gold Gold is a commodity which is widely recognised as safe-haven. You would like to assess the impact of incorporating gold into your clients investment portfolios. Your research assistant has provided you with the following monthly returns on gold: 2011 2010 2009 2008 2007 2006 2005 (0.025) (0.015) 0.052 0.108 0.002 0.078 (0.041) 0.012 (0.020) 0.098 0.037 0.053 0.009 (0.002) 0.037 0.016 (0.020) 0.050 (0.015) 0.004 0.026 0.035 0.032 (0.037) (0.061) 0.037 0.096 (0.012) 0.025 0.049 0.043 (0.023) (0.018) 0.106 (0.017) 0.012 0.023 0.018 0.001 (0.017) (0.117) 0.021 0.029 (0.032) (0.012) 0.057 0.015 0.063 (0.014) 0.019 0.016 (0.107) 0.000 (0.002) 0.032 0.045 0.050 (0.011) 0.071 (0.054) 0.041 0.056 0.047 (0.028) 0.059 (0.021) 0.030 0.021 0.080 (0.057) 0.068 0.072 0.014 0.015 0.007 0.073 (0.004) 0.003 0.070 2004

January February March April May June July August September October November December

0.012 0.037 0.045 0.006

You are also provided with the following monthly returns on FTSE100 index: 2011 0.022 (0.014) 0.027 (0.013) (0.007) (0.022) (0.072) 2010 0.032 0.061 (0.022) (0.066) (0.052) 0.069 (0.006) 0.062 0.023 (0.026) 0.067 (0.006) 2009 (0.077) 0.025 0.081 0.041 (0.038) 0.085 0.065 0.046 (0.017) 0.029 0.043 (0.041) 2008 0.001 (0.031) 0.068 (0.006) (0.071) (0.038) 0.042 (0.130) (0.107) (0.020) 0.034 (0.064) 2007 (0.005) 0.022 0.022 0.027 (0.002) (0.037) (0.009) 0.026 0.039 (0.043) 0.004 (0.089) 2006 2005 0.005 0.024 0.030 (0.015) 0.010 (0.019) (0.050) 0.034 0.019 0.030 0.016 0.033 (0.004) 0.003 0.009 0.034 0.028 (0.029) (0.013) 0.020 0.028 0.036 (0.003) 0.025 2004

January February March April May June July August September October November December Required:

0.012 0.017 0.024 0.008

a) Using the same formula you have used in Q1 (b), calculate the average monthly rate of returns and standard deviation of monthly returns for gold. (10 marks)

Investment Management Trimester1, 2012/13

b) Calculate the beta for gold by using a regression technique as follows: From the Microsoft Excel menu, go to Data and click on Data Analysis, then this Analysis Tools box will pop up:

Choose the Regression tool and the following Regression box will appear:

Select all the monthly returns for gold as input Y range Select all the monthly returns for FTSE100 as input X range

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Click on OK and you should then be able to see the regression output in the following format:

SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations ANOVA df Regression Residual Total Standard Error Upper 95% Lower 95.0% Upper 95.0% SS MS F Significance F

Coefficients Intercept X Variable 1 (Beta)

t Stat

P-value

Lower 95%

(Note: Beta is the coefficient on the variable X or FTSE100) (40 marks) c) Justify why gold should be considered in an equity investment portfolio. The following items should be included in your answers: Comparison of the information you have gathered in (b) with those from Question 1(b) above, Your interpretation of the beta for gold calculated in (b) above, and Citation and explanation from, at least, one academic journal article to further support your opinion. (50 marks) (Total: 100 marks)

Investment Management Trimester1, 2012/13

Question 3 Minimum-variance portfolios Instead of investing in a single security portfolio, you will also propose your risk-averse clients to invest in a minimum-variance portfolio. Required: a) Calculate the weighted average rate of return and standard deviation of returns for each combination of securities containing different weight of each: i. Sainsbury BAT ii. Sainsbury GSK iii. Sainsbury-Gold iv. BAT GSK v. BAT Gold vi. GSK Gold For example, for Sainsbury BAT portfolio: Weight Sainsbury BAT Weighted average rate of return Standard deviation of returns Tick the portfolio with the lowest risk

Portfolio

1 2 3 4 5 6 7 8 9 10 11

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0

1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0

(Note: You can use Microsoft Excel functions to expedite your calculations. Please show answers up to three decimal places only) (30 marks) b) (i) For each of the portfolio (i.e. i to vi), plot the portfolio risk-return for different weights of assets (Note: For the risk-return plots, return is on Y axis and risk is on X axis). (30 marks)

10

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(ii) Show a two-asset portfolio that has lower risk than the risk of either single asset. Summarize your answers in the following table: Sainsbury Sainsbury BAT GSK Gold Return Stdev Return Stdev Return Stdev Return Stdev (20 marks) (iii) Explain why the two-asset portfolio can have lower risk than the risk of either single asset. (5 marks) c) Based on the calculations you have done so far, propose and justify the best portfolio that meets your clients needs and risk tolerance. (15 marks) (Total: 100 marks) BAT GSK Gold

END OF QUESTION BOOKLET -

11

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REPORT FORMAT [Title of Report] Introduction (You should mention the background and objective of this report) Risky securities (a) [Name of security e.g., Sainsbury] (1 mark for headings) Monthly closing prices (GBP): 2011 2010 January February March April May June July August September October November December

2009

2008

2007

2006

2005

2004

Monthly rate of returns (to three decimal points): 2011 2010 2009 2008 January February March April May June July August September October November December

2007

2006

2005

2004

Investment Management Trimester1, 2012/13

(b) Sainsbury Average monthly stock returns Standard deviation of monthly returns BAT GSK

(c) (Your critically discussion on one major source of risk and one upside potential for each security. Support your opinions by citing from reliable sources).

Hedging with gold a) (Report the average monthly gold returns and standard deviation of its monthly returns here) b) Present your regression output as follows and mention indicate the beta:
SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations ANOVA df Regression Residual Total Standard Error Upper 95% Lower 95.0% Upper 95.0% SS MS F Significance F

Coefficients Intercept X Variable 1

t Stat

P-value

Lower 95%

c) (Your answers should include the following: Comparison of the information gathered in (b) with those from Question 1(b) above Correct interpretation of the beta for gold calculated in (b) above Citation and explanation from, at least, one academic journal article to further support your opinion)

Investment Management Trimester1, 2012/13

Minimum-variance portfolios a) [Name of portfolio e.g., Sainsbury-BAT] (1 mark for headings) (Note: Refer to spreadsheets for answers) Weight Sainsbury BAT Weighted average rate of return Standard deviation of returns Tick the portfolio with the lowest risk

Portfolio

1 2 3 4 5 6 7 8 9 10 11

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0

1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0

b) i. ii. Plot the portfolio risk-return graph for each table Minimum-variance portfolios Sainsbury BAT Sainsbury Return Stdev BAT Return Stdev GSK Return Stdev Gold Return Stdev GSK Gold

iii.

(Your explanation)

c) (Provide a recommendation on the portfolio that best suits your clients risk tolerance and investment horizon by including: A recommendation on the best minimum-variance portfolio Justification by reflecting on the analysis performed earlier (End the report with list of references in alphabetical order and consistent format).