Using the data provided in Appendix 1 (i.e. Tables 2-4) for numerical questions, write a report addressing the following:
- Critically discuss the capital asset pricing model (CAPM), and the single-index model (SIM). Briefly discuss any updates (i.e. at least one) to the original CAPM model and their purpose.
- Critically discuss the arbitrage pricing theory (APT), and the Fama-French (FF) three-factor model in terms of rationale for why (or why not) academics and or practitioners use them. Briefly discuss any updates (i.e. at least one) to the original FF three-factor model and their purpose.
- Economic indicators are often used to predict the business cycle. Provide an outlook for the economy based on data showing that the index of consumer expectations has risen and the initial claims for unemployment insurance has fallen. Critically discuss the consequences of that from a portfolio management perspective, elaborating on the choice of assets from cyclical and defensive industries.
- Using the Black-Scholes formula and the cumulative normal distribution (i.e. see Table 21.2 of the prescribed textbook), compute the call and put option prices using the data from Table 2 of Appendix 1. First 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.
- Assume the current futures price for gold for delivery 10 days from 28 October 2019 is US$1,494.70 per ounce. Suppose that from 29 October 2019 to 8 November 2019 the gold prices were as in Table 3 of Appendix 1. Assume one futures contract consists of 100 ounces of gold. Also, assume the maintenance margin is 5% and the initial margin is 10%.
- Calculate the daily mark-to-market settlements for each contract held by the short position. Briefly discuss basis risk (i.e. you can give an example if it makes it easier to discuss). [Hint: see Chapter 22 and examples 22.1 and 22.2 of the textbook.]
- Evaluate a 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 using data from Table 4 of Appendix 1. Assume the risk-free rate is 2.50%. Briefly discuss each of the four measures, plus the Morningstar risk-adjusted return model.
Capstone Assessment Requirements
The required word length for this report is 3000 words (plus 10% maximum)
- In terms of structure, presentation, and style you are normally required to use:
- AIB standard report format (see template)
- AIB preferred Microsoft Word settings
- Author-date style referencing (which includes in-text citations plus a reference list).
- These requirements are detailed in the AIB Style Guide.
- You are required to use 6-12 academic references for this report.
- All references must be from credible sources such as books, industry-related journals, magazines, company documents and recent academic articles.
Your grade will be adversely affected if your report contains no/poor citations and/or reference list and if the word length is beyond the allowed tolerance level (see Assessment Policy available on AIB website).