9008INMT Investment Analysis and Portfolio Management

Summary This assessment task is a 3000-word written report that requires students to: demonstrate their advanced understanding of the arbitrage pricing theory (APT) and the Fama-French (FF) three-factor model conduct an industry analysis using economic data of their choice compute call and put option prices using the Black-Scholes algorithm, and evaluate fund portfolio performance in terms of the market (e.g. outperformance or underperformance) using the Sharpe ratio, Treynor measure, Jensen’s alpha and the Information ratio. Referencing is Australian Harvard (AGPS) and outlined in the AIB Style Guide. Note: Insert this summary description when submitting a draft to Smarthinking. Learning outcomes Demonstrate advanced understanding of contemporary investment management theory, analytical frameworks and practice. Critically analyse and effectively communicate complex concepts, investment management issues and recommend improvements to inform professional practice. Plan and undertake a substantial evidence-based report in an ethical manner. Assessment questions Write a report addressing the following: Discuss why academics and practitioners use (and do not use) the arbitrage pricing theory (APT) and the Fama-French (FF) three-factor model. Economic indicators are often used to predict the business cycle. Choose an industry in a jurisdiction of your choice and critically analyse the factors that will determine its performance in the next three years. What is your forecast/outlook for the chosen industry in that period? Using the Black-Scholes formula and the cumulative normal distribution (Table 21.2 on p. 719 of the prescribed textbook) compute the call and put option prices using the data given in Table 1 below. compute d1 and d2 then using Table 21.2 in the textbook, find the N(d)’s and use interpolation if needed to find the exact call and put prices. Discuss the uses and limitations of call and put options and the results from Table 1. Table 1: Option information Stock price, S0 $50 Exercise price, X $50 Interest rate, r 0.03 (3% per year) Time to expiration, T 0.5 (six months or half a year) Standard deviation, ? 0.5 (50% per year) Dividends Nil Evaluate the WealthPlus fund’s portfolio performance in terms of the market (e.g. outperformance or underperformance) using the Sharpe ratio, Treynor measure, Jensen’s alpha and the Information ratio utilising data from Table 2 below. Assume the risk-free rate is 1.75%. Discuss the usefulness and reliability of each of the four measures. Table 2: Portfolio and market performance data WealthPlus portfolio Market Average return, x? 15% 13% Beta, ? 0.55 1 Standard deviation, ? 11% 11% Tracking error (non-systematic risk), ?(e) 1.5% 0 Prescribed reference Bodie, Z, Kane, A & Marcus, AJ 2020, Investments, 12th edn, McGraw-Hill Education, New York. (11th edition is also suitable). Other requirements You are required to use at least five (5) academic references for this report (in addition to any references covering additional data sources). Your references should be from credible sources such as books, industry-related journals, magazines or academic journal articles. Your grade will be adversely affected if your assignment contains no/poor citations and/or reference list and if your assignment word length is beyond the allowed tolerance level (see Assessment Policy available on AIB website). Use author-date style referencing (which includes in-text citations and a reference list – see Section 11: Referencing in the AIB Style Guide). The report format should follow the AIB Style Guide (i.e., cover page including your name and student ID, title and word count; executive summary; table of contents; body; list of references; and appendix, if needed). Use the AIB Report Template to format your report, or use the AIB-preferred Microsoft Word settings (see page 34 of the AIB Style Guide). Indicative report structure (Please note this is a suggested structure only) Cover Page Executive summary Table of Contents 1. Introduction (about 200 words) 2. APT and FF model discussion (about 600 words) 3. Economic indicators and the industry analysis (about 800 words) 4. Option pricing (about 400 words) 5. Performance evaluation (about 700 words) 6. Conclusion and recommendations (about 300 words) References Appendices (use sparingly, if at all. If used, contents must be discussed in the report) Appendix A Appendix B, etc. Grading criteria Your assessment will be marked according to the following grading criteria: Criterion 1: APT and FF model discussion. Understanding of the two models and their practical application and usefulness – 20% Criterion 2: Industry analysis. Use of economic indicators and provision of forecast/outlook for the chosen industry for the next three years – 25% Criterion 3: Option pricing. Using the Black-Scholes formula and discussion of results and limitations – 15% Criterion 4: Performance evaluation. Use of Sharpe ratio, Treynor measure, Jensen’s alpha and the Information ratio. – 20% Criterion 5: Recommendations. Propose justified recommendations for investment decisions – 10% Criterion 6: Communication. Presentation, structure and language – 5% Criterion 7: Referencing. In-text citations and referencing – 5%
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