Has standard deviation been a reliable predictor of risk?

Research Finance Project for National Australia Bank (NAB)

– Word Limit: 3000 words MAXIMUM (excluding graphs and referencing)

Section A: Background & Review of Literature
– Provide a background of the organisation including, but not limited, to the following:

1. History
2. Industry and Products/Services
3. Location(s) of business activities
4. Market Share
5. Directors
6. Latest P/E Ratio
7. Dividend Policy
8. Environmental Impact and Policy
9. Beta as given in literature

Section B: Price Statistics and Analysis

1. Record the daily closing price history of the company as well as the All Ordinaries Index (^AORD):
a. over the period 1 July 2006 to 1 July 2011;
b. over the period 1 July 2011 to 1 July 2016.

2. Calculate the variance and standard deviations of daily returns of the company as well as the All Ordinaries Index for the first time period:
c. using the FORMULAS
d. using the various EXCEL FUNCTIONS for the above measures.
Show BOTH CALCULATIONS on the Excel spreadsheet.

3. Prepare one line graph plotting the share price history of the company and the All Ordinaries Index (^AORD) for the first period (Excel).

4. Prepare a Histogram of daily returns with 8 ranges of equal size of the company for the first period (Excel).

5. Discuss your observations of the following:
a. To what extent the returns are normally distributed
b. What it tells about the risk as measured by the standard deviation of the company and the All Ordinaries Index.
c. How does the risk of the share compare with that of the market (All Ordinaries Index)

6. Has standard deviation been a reliable predictor of risk?
a. Calculate the actual average daily return of the share and the market for the second period and comment on the extent to which your findings relating to the first period have predicted the actual daily returns over the second period.
b. Provide an explanation for your comments in a.

7. Calculate the risk premium (Beta) for both the periods (Section B, question 1) using CAPM measure.
Section C: Changes and Recent Developments

– Provide a commentary of current and recent (within the last year) developments relating to the company.

Focus on changes that have had an impact on the share price of the company, including but not limited to development and changes relating to:
1. The industry in which it operates.
2. Legislative changes impacting the company.
3. Competitive pressures.
4. International events.
5. Major suppliers and customers.
6. Management and Ownership Changes.

Section D: Investment Recommendation

– Make a recommendation as to whether you would buy, sell or hold the shares.

Your recommendation can include suggested price levels but should be based on the analysis in sections A-C.

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