M107 Asset Pricing Coursework There is a choice of 5 coursework questions with a total opportunity of earning 100 points: 25 marks are awarded for attempting each of the first 4 questions, and 50 marks awarded for attempting Question 5. There are therefore two options: • answer the first 4 questions, or • answer question 5 and pick two questions from the previous 4. You may use various sources for corporate information. You have use of LSEG Refinitiv workspace which is likely to be the most useful platform for these assessments. Use of Python is also encouraged and details of how to use python are provided throughout the course. Coursework Questions 1. Build an efficient frontier using Python-25 points ➢ Subsection 1: select 5 companies, pull their historical prices over the period of 2010-01-01 and 2022-12-31 from Yahoo Finance or LSEG Refinitiv Workspace, and calculate their annualised return and volatility for the period. > Subsection 2: build the efficient frontier using 2000 simulations. > Subsection 3: specify the maximum Sharpe ratio portfolio (assuming a risk-free rate of 3%), report the weightings of each company in that portfolio and explain whether you would invest your money in this portfolio in the real world and why? 2. Equity CAPM - asset pricing theory/data run regression analysis- 25 points ➢ Subsection 1: define the CAPM and explain its primary purpose in the field of finance. Include the key components of the CAPM equation and their significance in evaluating the expected return of an asset. ➢ Subsection 2: Select 2 US companies from different industries and pull their historical daily prices over the past 10 years, 10-year yield (as risk free rate) and the daily historical prices of S&P500 from Datastream into excel. Run an OLS regression and interpret the estimated intercept and coefficient. ➢ Subsection 3: Critically evaluate the assumptions made in the CAPM and discuss their relevance in the real-world for investment decision-making. Highlight potential shortcomings of CAPM when applied to practical investment scenarios in both and active and passive portfolio management. 3. Option pricing - 25 points > Subsection 1: price the below European Call option using the Black-Scholes option pricing model using the following information: · Current Stock Price (So): $100 · Strike Price (K): $110 . Time to Expiration (T): 6 months (0.5 years) · Risk-Free Rate (r): 5% (expressed as a decimal) · Volatility (o): 30% (expressed as a decimal) Just as you are about to finalize the option price calculation, breaking news arrives that could potentially impact the stock's volatility. The news indicates that the company will be releasing a highly anticipated product within a week. As a result, there is a sudden surge in investor interest, and the market sentiment becomes more optimistic, leading to an increase in expected stock price movements. Reassess the option price calculation, taking into account the increased volatility. Assume that the new volatility value is 40% due to the upcoming product release > Subsection 2: plot the profit and loss diagram for short strangle and explain whether such strategy is positive or negative delta, gamma, theta, and vega > Subsection 3: in a covered call strategy (where you short a call option while owning the underlying stock), explain the importance of time to expiry in choosing which call option to short (assuming everything else remains equal) 4. Bond valuation - 25 points ➢ Subsection 1: A US Treasury 2.5% coupon bond maturing 15 August 2030 is trading at a clean price of 98-033/4 for value date 2 September 2023. The bond pays a semi-annual coupon on an actual/actual basis. What is the dirty price of the bond? ➢ Subsection 2: calculate the yield to maturity (YTM) and DV01 for a hypothetical bond with 10 year to maturity, 2% annual coupon, face value of $100m, and current dirty price of $75,206,268. Explain what DV01 implies. > Subsection 3: there is a 1-year project that starts in a years time. Your analysis shows that at the end of the 1 year investment, this project generates an 10% return on investment. You need to fund this project, you need to borrow from the debt market where the 1-year is 5% and 2-year rate is 8%. How would use this info to decide whether to invest in this project or not. 5. Investment case - 50 points > Imagine you are an Asset Manager, and you are tasked with producing a valuation/buy case for a FTSE 100 company for your investors. > Choose a company from the FTSE100 Index and write a 2,500-3,000-word investment case which contains the following: o A description and analysis of the business, its business sector, peer group and competitors. o Its geographical position and geopolitical strengths or vulnerability. o Detail your valuation of the company. Include analysis of the revenue profile, earnings, balance sheet, cashflow, capital allocation, management statistics, product range, DCF/Relative valuation etc. o Explain why you would buy this company. o Include graphics, technical analysis or other, to support the investment case. o Explain the corporate risks and how these could be mitigated.