Scribd
Upload
46 views2 pages

Questions

1. Jim Hale was assigned as an analyst to examine returns of Regional Express Holdings Ltd (REX) airline stock from September 2019 to August 2020. He was given the monthly closing prices and asked to calculate monthly/average returns, end-of-year price using geometric average return, and annual return using beginning and end prices. 2. In 2010, Charlotte Lynch's investment firm wanted to create a fund purchasing distressed mortgage-backed securities. They predicted the fund's annual return could be 50% with 10% probability in a rapid economic expansion, 35% with 50% probability in modest growth, 5% with 35% probability in no growth, and -100% with 5% probability in a recession. Charlotte was

Uploaded by

Zehra Khan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
46 views2 pages

Questions

1. Jim Hale was assigned as an analyst to examine returns of Regional Express Holdings Ltd (REX) airline stock from September 2019 to August 2020. He was given the monthly closing prices and asked to calculate monthly/average returns, end-of-year price using geometric average return, and annual return using beginning and end prices. 2. In 2010, Charlotte Lynch's investment firm wanted to create a fund purchasing distressed mortgage-backed securities. They predicted the fund's annual return could be 50% with 10% probability in a rapid economic expansion, 35% with 50% probability in modest growth, 5% with 35% probability in no growth, and -100% with 5% probability in a recession. Charlotte was

Uploaded by

Zehra Khan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 2

Question 1

After graduating from university last year with a degree in accounting and finance, Jim Hale took a job as a trainee
analyst for an investment company in Melbourne. Jim’s first few weeks were filled with a series of rotations
throughout the firm’s various operating units, but this week he was assigned to one of the firm’s traders as an
analyst. On Jim’s first day, his boss called Jim in and told him he wanted to do some rudimentary analysis of the
investment returns of the regional airline Regional Express Holdings Ltd (REX). Specifically, Jim was given the
following month-end closing prices for the company spanning the months from September 2019 to August 2020:
Questions

1. Compute the monthly realized rates of return earned by REX for the entire year.

2. Calculate the average monthly rate of return for REX, using both the arithmetic and geometric averages.

3. Calculate the year-end price for REX, computing the compound value of the beginning-of-year price of $ 1.11 per
share for 12 months at the geometric average monthly rate of return calculated earlier:

End-of-year stock price = Beginning-of-year stock price X (1+ Geometric average monthly rate of return) 12

4. Compute the annual rate of return for REX using the beginning share price for the period and the ending price
(i.e. $1.11 and $0.82).

Jim was then instructed by his boss to complete the following tasks using the REX price data (note that REX paid no
dividend during 2008).

5. Use the geometric average monthly rate of return and the following relationship to calculate the annual rate of
return:

Compound annual rate of return= (1+ Geometric average monthly rate of return) 12 -1

6. If you were given annual rate of return data for REX or any other company’s shares and you were asked to
estimate the average annual rate of return an investor would have earned over the sample period by holding the
shares, would you use an arithmetic or geometric average of the historical rates of return? Explain your response
as if you were talking to a client who has had no formal training in finance or investments.

Question 2

1|Page
In the middle of 2010, Charlotte Lynch had been working for a year as an analyst for an investment company that
specializes in serving very wealthy clients. These clients often purchase shares in closely held investment funds with
very limited numbers of shareholders. In late 2008, the market for certain types of securities based on real-estate
loans simply collapsed as the sub-prime mortgage scandal unfolded. Charlotte’s firm, however, saw this market
collapse as an opportunity to put together a fund that purchases some of these mortgage-backed securities that
investors have shunned by acquiring them at bargain prices and holding them until the underlying mortgages are repaid
or the market for these securities recovers.

The investment company began putting together sales information concerning the possible performance of the
new fund and made the following predictions regarding the possible performance of the new fund over the ensuing
year as a function of the performance of the economy:

State of the economy Probability Fund return


Rapid expansion 10% 50%
Modest growth 50% 35%
No growth 35% 5%
Recession 5% -100%

Charlotte’s boss asked her to perform a preliminary analysis of the new fund’s performance potential for the
coming year. Specifically, he asked that Charlotte address each of the following issues:

Questions
1. What are the expected rate of return and standard deviation?
2. What is the reward-to-risk ratio for the fund based on the fund’s standard deviation as a measure of risk?
3. What is the expected rate of return for the fund based on the Capital Asset Pricing Model?
In addition to the information provided above, Charlotte observed that the risk-free rate of interest for the following
year was 4.5%, the market risk premium was 5.5% and the beta for the new investment was 3.55. Based on your
analysis, do you think the proposed fund offered a fair return given its risk? Explain.

2|Page

You might also like