MACQUARIE UNIVERSITY Faculty of Business and Economics AFIN828 International Investment and Risk Assignment Semester 1 / 2013 1) Using the price series provided in the spreadsheet assignment_data.xls calculate the monthly returns for Westpac (WBK), Wesfarmers (WES) and Rio Tinto (RIO) for the considered time period from January 2nd, 2012 to January 1st, 2013. (25 Marks) a) Considering a possible investment in WBK and WES, calculate the mean (monthly) return, the standard deviation of return and the coefficient of correlation between the returns. Using Excel, produce a chart showing alternative risk-return combinations in terms of 5% (e.g. 0% in WBK and 100% in WES, 5% in WBK and 95% in WES, 10% in WBK and 90% in WES, etc.) from the two investments. Interpret your results, also in comparison to investing in either of the individual stocks. Meanwhile please also calculate the minimum standard deviation of the portfolio contains these two stocks via EXCEL SOLVER. b) Now assume that an investor is interested in combining all three stocks into an optimal portfolio. Using a spreadsheet and the Excel Solver Tool, calculate the optimal weights for each of the investments such that they maximize the expected portfolio return for a given standard deviation of portfolio return (assume that the individual weights have to be positive or zero, so no short-selling is allowed). Provide the expected returns and individual weights of the optimal portfolio with a standard deviation of 6% and 6.5%. c) Provide a plot that contains several alternative risk-return combinations for the optimal three asset portfolios. Also plot the efficient frontier. Interpret your results in comparison to the two asset case in a).

2) Assume that on 1/8/2012, when the WBK share price was S= AUD 22.5 a trader has sold 200,000 European WBK call options with strike price K=25 and expiration date 1/11/2012. Suppose that the amount received for the options was AUD 200,000. Further assume that the yearly standard deviation of WBK returns is 40%, the risk-free rate is 3% and that WBK doesn’t pay any dividend during the time-period from 1/8/ 2012 to 1/11/2012. (20 Marks) a) Using the DerivaGem software, apply the Black-Scholes formula to calculate the price of the option as well as the delta, gamma, vega, theta and rho of the option (we can use week as the time units with respect to time to exercise and we assume there are 52 weeks in each year). Interpret your results. Further, provide a graph showing (i) the relationship between the value of the option and the strike price, (ii) the Delta of the option as a function of the stock price, (iii) the relationship between the Gamma of the option and the volatility of the stock price, (iv) the relationship between Vega of the option and the stock price, (v) the relationship between Rho of the option and the stock price. For each graph, provide a brief explanation and interpretation. b) Explain how the trader can hedge the risk and make his option portfolio delta neutral. Further assume that every week (on 1/8, 8/8, 15/8, 22/8 etc.) until maturity of the option, the trader decides to rebalance his portfolio to preserve delta neutrality. Provide a Table that contains for each week, the share price, the current delta of the option, the number of shares purchased/sold, the cost of shares purchased/sold, the cumulative cost including interest and the interest cost. What is the overall profit or loss of the trader at maturity of the option? Interpret your results. c) Assume that on 1/8/2012 there is another WBK call option available in the market with strike price K=AUD 23 and expiration date 27/9/2012. Assume again that the yearly standard deviation of WBK returns is 40% and the risk-free rate is 3%. Illustrate how on 1/8/2012 this option can be used to create (i) a delta- and gamma neutral portfolio; (ii) a delta- and vega-neutral portfolio.

3) Assume that the risk-free rates (treasury rates) are 3% for 6 months and 3.5%...

...The fact is that you cannot get rich without taking risks. Risks and rewards go hand in hand; and, typically, higher the risk you take, higher the returns you can expect. In fact, the first major Zurich Axiom on risk says: "Worry is not a sickness but a sign of health. If you are not worried, you are not risking enough". Then the minor axiom says: "Always play for meaningful stakes".
The secret, in other words, is to take calculated risks, not reckless risks.
In financial terms, among other things, it implies the possibility of receiving lower than expected return, or not receiving any return at all, or even not getting your principal amount back.
Every investment opportunity carries some risks or the other. In some investments, a certain type of risk may be predominant, and others not so significant. A full understanding of the various important risks is essential for taking calculated risks and making sensible investment decisions.
Seven major risks are present in varying degrees in different types of investments.
Default risk
This is the most frightening of all investmentrisks. The risk of non-payment refers to both the principal and the interest. For all unsecured loans, e.g. loans based on...

...Since 1980, International Country Risk Guide (ICRG International Country Risk Guide) has provided expert financial, political and economic risk analysis for investors and international business professionals. The ICRG evaluates both the obvious developments and the subtle factors that cursory annual reviews all too frequently miss. In this guide, we find that the political risk is given (100 points) which is twice the weight of financial and economic risk (50 points)
Determinants of FDI Flows to Developing Countries (82-86)
Dunning (2008) put theoretical framework for, FDI determinants. the framework posits that firms invest abroad to look for three types of advantages: Ownership (O - The ownership-specific advantages “of property rights/patents, expertise and other intangible assets” allow a firm to compete with others in the markets it serves regardless of the disadvantages of being foreign because it is able to have access to, and exploit and export natural resources and resource-based products that are available to it.), Location (L – are those that make the chosen foreign country a more attractive site “such as labor advantages, natural resources, trade barriers that restrict imports, gains in trade costs and strategic advantages through intangible assets” for FDI than the others ), and Internalization (I – arise from exploiting imperfections in external...

...Chabros International Group: A World Of Wood
As many other companies Chabros International Group faced a financial crisis after the global economic crisis in 2009. The decision from Chami of investing $ 11 million in his Serbian sawmill was taking right before the beginning of the crisis and may have been crucial.
Why did Chabros operate internationally?
In order to understand Chami’s decision we have to take into account which reasons he argued for expanding his business outside of Lebanon. First of all, Lebanon was a very unstable country and when Chabros received by occasion the first orders from Lebanese customers in Dubai he did not think twice to expand into this country. In 1998 they opened their first branch outside of Lebanon, which led automatically to a share of risk in their operations. From this point on Chabros did not depend anymore on one single market. Another important reason for the expansion was that they could significantly increase their sales numbers.
Change in expansion motivations
Through this first very positive experience Chami was convinced about his internationalisation plans and his next country on the list was Saudi Arabia. The market entry was not as easy and successful as the one in Dubai. This was partially due to a different strategy with Italian partners as a joint venture which caused problems through cultural differences (Both Italian partners left the market between the first and second...

...for their investments over time
2. How can the Capital Asset Pricing Model be used to estimate the cost of capital (required return) for calculating the net present value of a project's cash flows?
- it will help us determine the Cost of capital or discount rate which we can use to calculate NPV, in other terms the numerator will never change (FCF), only the denominator will based on the cost of capital
3. What is the estimate of the risk-free rate that should be employed in calculating the cost of capiual for Ameritrade's proposed investment?
- the risk free rate should be the T-bills rate or the average annualized total annual returns on US government securities = 3.8%.
In my opinion, we should use the risk-free rate equal to yield of 20-year US government securities, because it is long-term capital investment. We may use 30-year rate, but we are investing in technology, and concerning the speed of technological enhancements, 20-year rate is optimal. So it is 6,69%
4. What is the estimate of the market risk premium that should be employed in calculating the cost of capital for Ameritrade's proposed investment?
Market Risk Premium
Three distinct concepts are part of market risk premium:
1) Required market risk premium: the return of a portfolio over the risk-free rate (such as that of treasury...

...Risk Analysis on Investment Decision
Net present value, internal rate of return, and profitability index are measures used to compare two mutually exclusive capital investment proposals. "SAI wants to increase market share and keep up with technology, which can be done by either expanding their existing Digital Imaging market share or by entering the Wireless Communication market," (UoP, 2007). Both alternatives have areas of opportunity as well as potential risks that the company will have to consider. This paper will analyze the investmentrisk decisions SAI currently faces with the objectives of increasing its market share and keeping pace with technology.
An analysis reveals that an expansion into the wireless communication market may be beneficial to SAI. SAI's specialized chip, used in data enabled mobile phones, has performed well in pilot tests, (UoP, 2007). A number of risks, internal and external, are inherent in joining this industry. Similarly, a number of strategies are available to mitigate these risks.
One risk associated with the decision to enter into wireless communications is that of market risk. Market risk is made up of the uncertainties of changes to market prices or rates. While this type or risk is a little harder to foresee than others, SAI can lessen its risk....

...
Risk of Investment
Doug Johnson
Argosy University
An investor considering foreign securities for their investment portfolio would perform an analysis of diverse mutual funds, exchanged traded funds (ETFs), along with stocks or bonds traded in the perspective country. As part of the analysis process of selecting foreign securities the investor normally studies the risk-rating/politicalrisk map of the specific country where the investment is being consider (Johnstone, 2010). This document discusses the risk of investment in politically and economically unstable countries, along with providing a few foreign investment suggestions.
Economic and political risks
According to (Perry, 2013) there are two types of risk to be considered before procurement of foreign securities. Economic risk and political risk are to be considered for any foreign investment. Economic risk is defined by (Perry, 2013) as a nation’s ability to repay its debt. A country with a strong economy and stable finances will usually be a more reliable investments than an unstable country. Political risk as defined by (Perry, 2013) is related to political decisions a country may make that might result in an investment loss...

...their psychographic characteristics, such as user personality, values, attitudes, interests and risk tolerance in terms of willingness. These psychographic classifications are extremely relevant with regards to individual strategy and risk tolerance. Even with the similar bank transactions data and spending category, an investor background, past experience, personality and attitudes can make investment process unique for each individual. With the help of behavior finance theory, HelloWallet can build system to fit psychographic profiles to specific behavioral investor profile. As a result, a better understanding of user behavioral tendencies of spending and investment will help to provide better financial advice.
An easy and quick way is to build online questionnaire to fit each individual into different behavioral investor types. There are several models we can use, Barnewall Two-way model, Bailard, Biehl, and Kariser Five model and Pompian model. We use Pompian models as an example. The major reason for promoting Pompian is because it is less time-consuming and less complex. Therefore, it will be easy to be implemented on an online system and require less time spent on filling out the survey (as we pointed out in challenge, it is not an easy task to ask online user to fill out survey with a lot of details).
Pompian model identifies four behavioral investor types based on risk tolerance and...

...examined in detail to seek if Vietnam could be a possible decision.
2.2. Vietnam Market – Overview
It can be said that Vietnam is a full potential market in term of merchandise and grocery.
Figure 1 Vietnam retail sales
First of all, according to data from WorldBank (WB), the rate of economic growth in Vietnam has constantly increased as the increasing of GDP per capital index. This result shows that Vietnamese market is getting develop as well as able to open and provide a healthy environment for foreign Investor. Furthermore, since Vietnam implemented “Doimoi” policy in 1986 and joined World Trade Organization (WTO) in 2007, the local Government has promulgated various incentive programs such as exemption in tax for some form of investment projects also committed opening market for commodities and services with WTO on around 110 subsectors. As long as the supporting from Vietnamese authority, Tesco PLC should definitely finds advantages for the expansion strategy. Last but not least, one other important factor which is indicated by Figure 2 as the increasing of customer’s demand on retail industry should be referred as the bright trend for Tesco.
2.3. Vietnam market – In detail
We will take into account the Vietnam market comprehensively as following sectors:
Economy
Until now, Vietnam economy has recognized positive signals. Firstly, over the period of five years from 2011-2015, Vietnam economic growth not only goes on plan but also exceeds the target...