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Assignment details:

Section A:

You are a consultant at a major investment institution. Your institution has a long- standing business relationship with Humberside plc, which is listed on the London Stock Exchange. A new CEO has just been appointed at Humberside plc, she is very ambitious and wants to increase the market value of her company as much as possible.

She believes that she has an excellent strategy for the core business of the company. She is, however, rather worried that the risk management and financial issues may cause the share price of her company to underperform. She has commissioned you to write a briefing report explaining the following matters:

i) What are the main financial and other risks she needs to be aware of and how these may affect the market value of the company?

(25 marks)

ii) Explain how the use of derivatives impact on the companys risk. You need to write the literature review about the role of derivatives in decreasing (increasing) the corporate risk.

(25 marks)

Section B

You are a financial analyst in the risk management department of the pension fund. Your manager has requested the following:

i) Construct a diversified portfolio consists of two assets and calculate the efficient portfolios.

a) The data could be obtained from Bloomberg or yahoo finance.

b) Select three companies (from different sectors) listed in FTSE 100, FTSE 250, S&P 400, S&P 500 or S&P 600.

c) Show the expected return, standard deviation and covariance for each portfolio of two companies (1&2, 1&3, and 2&3)

d) The data period of analysis is 5 years (monthly data from 2015 to 2019).

e) Use intervals of 10% for the different weights.

f) Identify the global minimum-variance portfolio.

(25 marks)

ii) Retrieve monthly stock and benchmark returns and perform a regression analysis to estimate your chosen companies betas using the Capital Asset Pricing Model (CAPM).

a. The data could be obtained from Bloomberg or yahoo finance.

b. Select 5 companies from different sectors (listed in FTSE 100, FTSE 250, S&P 400, S&P 500 or S&P 600) over the period (2015-2019).

c. Which company has the lowest risk?

d. Show the descriptive statistics for the 5 firms. Do you think this analysis is important?

e. Select relevant monthly market risk-free rates for a 5-year period. Discuss the choice of your risk-free rates. Evaluate your results.

f. Calculate Treynor ratio and interpret its results.

Notes:

1. The excel files must be submitted alongside assignment.