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Briefly discuss the four asset classes in Table 1. Using the data from Table 1, calculate the Arithmetic Mean (AM), Geometric Mean (GM) and Standard Deviation (σ) of returns of each of the four asset classes. Briefly discuss the risk-return characteristics of each asset class with reference to these measures. Construct an efficient portfolio. Assume the risk free rate over the period is 6.4%. Calculate the Efficient Frontier and Capital Allocation Line (CAL) for three asset classes: Australian Shares, Australian Bonds and the Australian Cash Rate using the Excel Solver Tool (see prescribed Textbook Chapter 7, Appendix A for guidance). You will also need to calculate and provide ‘Bordered Covariance’ and ‘Correlation Matrices’. Repeat the above steps with all four asset classes i.e. include International Shares and add the new efficient frontier and CAL to the previous graph. Discuss the implications of the addition of international shares on the efficient frontier and CAL compared with the first three assets efficient frontier and CAL. Briefly explain how fiscal and monetary policy can influence an economy. Discuss the three main factors that determine how sensitive a firm’s earnings are to the business cycle. Using the Black-Scholes formula and the cumulative normal distribution (i.e. see Table 21.2, p. 740 of the prescribed textbook), compute the call and put option prices using the data from Table 2.
