GROUP ASSIGNMENT-INVESTMENT ANALYSIS BBA17 Deadline: 15 November 2020 Instructions: 1. The assignment must address all questions under Part A to D totalling 100 marks and its weighting of the overall...

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GROUP ASSIGNMENT-INVESTMENT ANALYSIS BBA17 Deadline: 15 November 2020 Instructions: 1. The assignment must address all questions under Part A to D totalling 100 marks and its weighting of the overall score for the subject is 20%. 2. You need to include a group acknowledgement pledge with a list of the team members who contributed to the work as shown in Appendix I, as the front page of your report. Minutes of meetings should be kept as records for proof of teamwork. Each team has been assigned a group ID as per Appendix II which references the subsequent Appendices. Each group is allocated a specific portfolio as outlined in Appendix III to attempt part A. Similarly, Appendix IV provides the specific put options and underlying asset for Part B. As for Part D, the two countries for comparison has been assigned to each respective team in Appendix V. If you deviate from what has been allocated to your team in Appendix I-V, you will score nil marks for this particular section of the assignment. 3. If plagiarism is suspected, your assignment marks will be kept on hold until full investigation is completed and reported to the Dean who will make the final call on the outcome. 4. The assignment should be combined in a single report in the word document attached with the Excel worksheets. Octave scripts and/or Python scripts and/or Excel worksheets should be copied as tables in the word document. Maximum word limit is 1000. 5. You are expected to research information which is not provided in the links below to produce a quality report. Marks will account for proper in-text referencing and end-of- text referencing. 6. The complete report shall be submitted through Safe Assign on the Blackboard before 15 November 2020 midnight. Late submission will carry a penalty of 10% per day of delay, which implies a 10-day delay will result in nil marks for the assignment. Disclaimer: The assessment questions are prepared by Rajesh Lucknauth for the sole purpose of a group assignment for Investment Analysis class at SP Jain Global School of Management. It does not represent any investment advice. The questions cannot be communicated to any third party. CASE STUDY: PART I (25 marks) A 40-year old Australian-based singer, Mr Sebastian, has amassed personal assets with a net worth of $15.0million and is planning to invest $10.0million in a portfolio and the rest will be invested in a high-tech business venture. He has asked for your financial advice. Mr Sebastian is fond of playing competitive team sports like Rugby and Soccer and is usually sad and upset when his team lost a match. His competitive spirit is reflected in his investing style. He often reads the Bloomberg news feed on his smartphone. He is an avid reader of books written by investment gurus, namely King Icahn and Warren Buffett. He seeks expert advice but he always likes to have a good debate before making up his mind. He started his singing career as you-tuber and recorded all his songs using a smartphone. Following his rise to fame, he now owns a music studio where he rehearses his songs and music. You have researched three assets (i. e: asset 1, asset 2 and asset 3 as allocated to each team as per Appendix II & III) and are planning to do the following tasks: (i) Compute the assets’ respective average annualised returns, variance and covariance between each pair of the assets based on daily historical data over the last 3 years; [4 marks] (ii) Construct a portfolio using the asset 1, 2 and 3 such that the Sharpe ratio is maximised; [5 marks] (iii) Construct an optimal portfolio which matches the investor’s risk tolerance (as per Appendix II and III) with the capital market line; [5 marks] (iv) Determine the equity beta of asset 3 using regression analysis of daily historical data over the periods: (i) 1 January 2020 till 30 September 2020 and (ii) 1 January 2019 till 30 September 2020. Compare your results for the beta over the two sample periods and provide a valid interpretation. [7 marks] (v) Referring to the psychographic profiling model outlined in this course, identify the type of investor you would describe Mr Sebastian. Provide valid reasons to support your judgement. [4 marks] PART II (25 Marks) On 30 September 2020, Mr Sebastian is concerned with the price risk of asset 3 (as per Appendix III) and has asked you to hedge the risk. You are pondering on how to design a delta-gamma hedge with two put options as per Appendix II & IV. (a) Determine the implied volatility of the put option 2 and compare with the historical volatility of the stock for the period 1-Jan-2020 till 30-Sep-2020. Provide an interpretation of the comparison. [8 marks] (b) Use the historical volatility to determine whether the put option is fairly valued. [4 marks] (c) Determine the number of the respective put options to buy or sell to devise the delta- gamma hedge. Hint: you need to work out the delta and gamma of the put options. [9 marks] (d) Discuss the risks (if any) of the delta-gamma strategy. [4 marks] PART III (25 Marks) On 30 September 2020, Mr Sebastian launches a virtual music business start-up and has set up a defined benefit plan scheme for the company’s 30 employees with an average age of 30, earning an average salary of $100,000 which is growing at a compounding rate of 5% per annum. The company will sponsor the contributions to a separately managed fund with the main objective of generating a future stream of 20 years of constant post-retirement income equivalent 30% of their salary at the time of retirement. The pension fund’s operational expenses will be borne by the company and will not be accounted for in the books of the defined-benefits obligations (DBO) plan. The fund is not planning any claims over the next 30 years and is considering the average retirement age is 60, after which the actuarial assumption of post-retirement mortality risk averages 10% and the discount rate for the future liabilities is 2% p.a. The funds’ contributions will be 10% of the company’s annual payroll. The plan’s assets accumulated at the end of the 30th year from now (i.e.: at the retirement age of the current workforce) are shown in Exhibit 2. Exhibit 1: Forecast Bond Portfolio: Forecast Bond Yields and Asset allocation in 30 years Assets Coupon rate (%) Yield (%) Allocation (%) Cash Balances N/A 0.14% 10.0 90-day Australian government bills N/A 1.23% 10.0 2-year Australian government bond 1.45% 1.45% 20.0 10-year Australian government bond 2.5% 2.50% 30.0 30-year BOQ perpetual preference shares 3.85% 3.85% 30.0 (i) Determine the minimum expected return of the portfolio from contributions which will accumulate to match the projected benefit obligations (PBO) in 30 years. [10 marks] (ii) Provide an interpretation of the risk tolerance of the defined benefit plan and infer whether the expected return is reasonable. [5 marks] (iii) Quantify the effect on the monetary value of the fund status if there is a downward parallel shift in the yield curve by 150 basis point in the next 30 years. [6 marks] (iv) Discuss an appropriate strategy to hedge the interest rate risk, as applied to the above information. [4 marks] PART IV (25 Marks) Mr Sebastian has downloaded the article and has forwarded it to your email address. He asked you to interpret the article and address his questions. It will be very insightful if you can provide supporting evidence from the article and other referenced sources. https://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/a- rolling-disruption-covid-19s-implications-for-private-equity-and-portfolio-companies# (i) Referring to the private equity fund survey, which two industries have been the most adversely impacted by the pandemic in 2020? [6 marks] (ii) Which two industries have scope for significant growth for private equity firm’s portfolio allocation? [6 marks] (iii) Referring to Exhibit 3, perform a comparative sector analysis between the two nominated countries (please refer to Appendix II & V for your two countries) and provide an insight into the correlation between the two markets. [13 marks] https://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/a-rolling-disruption-covid-19s-implications-for-private-equity-and-portfolio-companies https://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/a-rolling-disruption-covid-19s-implications-for-private-equity-and-portfolio-companies APPENDIX I SUBJECT : Investment Analysis ASSESSMENT : Group Assignment DATE : PLEDGE We declare that this assignment is our work which has been expressed in our own words. All the members listed below have contributed to the overall work without the assistance of parties other than the team members listed below. We are aware that all forms of plagiarism or unauthorised collusion can be subject to penalty. Group ID: ………………………………………………………………………………………………. No First Name Last Name Student ID Contribution Signature 1 2 3 4 Signature: ……………………………………………………………….. Team Leader: …………………………………………………………... Date: …………………………………………………………………….. NB: Please keep minutes of meetings (and emails) in your records. APPENDIX II Investment Analysis - OL ZOOM Group First name Last name OL1 Otabek Pardaboev OL1 Ulug'Bek Polatov OL1 Mohak Saha OL1 Nikola Ilievski OL10 Mankaran Tanwar OL10 Shrivar Mor OL10 Rahul Lakhani OL10 Rumelle D'Souza OL11 Aditya Sapam OL11 Nyunsoo Na OL11 Vellen Moorghen OL11 Robert Byrne OL12 Hardik Gupta OL12 Rithvik Vuluvala OL12 Swasti Jain OL12 Syed Abdul Raheem Quadri OL13 Isha Kakkad OL13 Vignesh Srinivasan OL13 Abhilasha Bhuraria OL13 Kalyani Iyer OL14 Dhruv Prasad OL14 Khushi Hiranandani OL14 Shivam Sharda OL15 Tejaswini Patil OL15 Munkhtergel Oyunbat OL15 Shivam Chowdhry OL2 Ditya Permatasari OL2 Jasmine Paras OL2 Maureen Wilando OL2 Uyanga Batbaatar OL3 Jialu Wu OL3 Omic Swami OL3 Swaruba K. S. OL3 Shreyak Chaudhary OL4 Dakshita Bhatia OL4 Harsh Jain OL4 Mihir Bamb OL4 Samay