Banking and Finance

Tutorial Exercises

BFF5220
Applied Investments
Semester 2, 2023

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https://www.monash.edu/business/banking-and-finance
 BFF5220 Applied Investments
WEEK Starting LECTURE TOPIC
1 24 Jul Financial Markets,
Securities Trading and
Performance
Measurement
2 31 Jul Portfolio Theory
3 07 Aug Asset Pricing Models
4 14 Aug Asset Pricing Models
(cont.)
Fundamental Analysis I
5 21 Aug Fundamental Analysis II
ASSIGNED TUTORIAL TOPIC
READING
BKM, Ch. 3, 5 Self-study on Pre-Semester
Test, Accounting and
Statistics. Group Formation.
Free-Style Discussion of
Articles on Fin Mkt News.
BKM, Ch. 6, 7 Financial Markets, Securities
Trading and Performance
Measurement
BKM, Ch. 9, 10 Portfolio Theory
BKM, Ch. 9, 10, 17 Asset Pricing Models
Other reading on
Moodle In-tutorial Group Assignment
Instruction Discussion, Q&A
BKM Ch. 18 Formative task: Online
submission of literature review
of return patterns

Fundamental Analysis I

6 28 Aug Fundamental Analysis III BKM Ch. 18 Q&A on Group Assignment

Other reading on
Moodle
7 04 Sep Market Efficiency BKM Ch. 11 Formative task: Submission
of first attempt on R
programming code for one
return pattern.

Fundamental Analysis II &

Advanced/Practical Topics in
Fundamental Analysis
8 11 Sep Behavioural Finance BKM Ch. 12 Market Efficiency

9 18 Sep Options Trading BKM Ch. 20 Behavioural Finance

Strategies
Mid-Semester Break starting on 25 Sep
10 02 Oct Option Valuation BKM Ch. 21 Options Trading Strategies

11 09 Oct Futures, Forwards and BKM Ch. 22, 23 Option Valuation

Swaps

12 16 Oct Fixed Income Securities BKM, Ch. 15, 16 Futures, Forwards and Swaps

SWOT/VAC 23 Oct SELF STUDY, Fixed Income Securities

Mid-Semester Test Mid-Semester Break Asset Pricing Group Assignment

Students are required to prepare answers for all questions. Due to time constraints, students are
encouraged to nominate the questions/problems for discussion at the commencement of each
tutorial. Solutions for all questions will be available in the form of video recordings by the end of
each week.
Topic 4 W5 – Asset Pricing and Fundamental Analysis I
Q.1.

Bart Campbell, CFA, is a portfolio manager who has recently met with a prospective
client, Jane Black. After conducting a survey market line (SML) performance analysis
using the Dow Jones Industrial Average as her market proxy, Black claims that her
portfolio has experienced superior performance. Campbell uses the capital asset pricing
model as an investment performance measure and finds that Black’s portfolio plots below
the SML. Campbell concludes that Black’s apparent superior performance is a function
of an incorrectly specified market proxy, not superior investment management. Justify
Campbell’s conclusion by addressing the likely effects of an incorrectly specified market
proxy on both beta and the slope of the SML

Q.2.

Carefully read the BKM textbook section regarding Fama-French three factor model and
the section on multi-factor models in lecture 3 (part A) to answer the following questions:

a. What are the risk factors incorporated in the Fama and French three factor models?
How are they measured?

b. Why do we not subtract the risk-free rate from SMB or HML? Why do we subtract
the risk-free rate from Rm?

c. Cahart (1997) incorporated a forth factor so called “momentum” into the Fama-
French three factor model. Fama and French (2018) reluctantly include the
momentum factor into their five factor model to create the six factor model. Define
“momentum” and describe how it is measured in both cases.

d. Fama and French (2015) introduce the five-factor model. What is the difference in the
way the SMB and HML factors are measured in the three-factor model and the five-
factor model?

e. Suppose I sort stocks into portfolios by their CAPM betas to detect any new return
pattern and document the results in the below table. Is there any evidence suggesting
a new ‘anomaly’ (i.e. return pattern not explained by existing asset pricing models)
with respect to the CAPM?

Beta 0.84 0.89 0.93 0.98 1.04 1.09 1.12 1.19

Returns 0.45 0.62 0.80 0.99 1.16 1.45 1.48 1.72

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Q.3.

Intercept MRP SMB HML

0.44019 0.79376 0.05243 -0.11812
-0.1488 1.1116 -0.1197 -0.3328

The above are coefficients estimates obtained by running the Fama-French three factor
model on two different assets. One of the assets is a portfolio of stocks from the
consumer goods industry, and another is a portfolio of stocks from the tech industry.
Deduce which portfolio is which, given your knowledge of the differing characteristics of
the two industries.

Q.4.

On the following page is an excerpt of a table replicated from The cross section of
expected stock returns (Journal of Finance, Fama and French (1992)). Interpret the
relevant section in the table and explain the manifestation of why Fama and French
suggest that the CAPM should be augmented with Book-to-Market to describe stock
returns in the cross-section.

Q.5.

Four steps for business analysis are strategy analysis, accounting analysis, financial
analysis and prospective analysis. As a financial analyst, explain why each of these steps
is a critical part of your job and how they relate to one another.

Q.6.

Differentiate sell-side and buy-side fundamental analysts and describe the differences in
their incentives. What potential biases may be present in the work of these two types of
fundamental analysts due to the divergence in their incentives?

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