CITY UNIVERSITY OF HONG KONG
DEPARTMENT OF MANAGEMENT SCIENCES
MS4226 Financial Risk Analytics
Assignment solution
Deadline: (Friday) 21st April 2023
Guideline:
1. To answer the question, fill the missing value in the box.
2. Submit the answers on CANVAS.
a. Only submit the consolidated answer for each question
b. Marking for whole question (no partial mark for each part except specified)
c. Multiple attempts, but each submission will be deduced 5%
i. The first attempt is 100%
ii. The second attempt is 95%
iii. The third attempt is 90.25%, etc.
3. CAUTION!!!!!! CONFIRM YOUR ANSWERS BEFORE SUBMISSION
4. PLAGIARISM IS STRICTLY PROHIBITED.
Question 1
Download the historical data of company Coke cola (K.O.), Tesla (TSLA) and S&P 500 (SPX) from the Wall
Street Journal (WSJ) market
https://www.wsj.com/market-data/quotes/KO/historical-prices
https://www.wsj.com/market-data/quotes/index/SPX/historical-prices
https://www.wsj.com/market-data/quotes/TSLA/historical-prices
Time period: from 28-Feb-2020 to 1-Mar-2023
= + +
• Use the return of the asset from 2-Mar-2020 to 1-Mar-2023, and the number of returns is 36
• Use the close price of the first day of the month to calculate the return.
a. Using the single index model to calculate the last 3-year monthly beta () of the return of the company
Coke Cola compared with the return of the S&P 500.
=
=
b. What is the performance of the stock price of the company Coca-Cola?
(1) Underperform / (2) Overperform
c. What is the systematic risk of the company Coca-Cola?
(1) Low systematic risk / (2) Fair systematic risk/ (3) High systematic risk
Q1a - c: Write your answer as a thirteen-digit number
(Ignore the full stop)
d. Using the single index model to calculate the last 3-year monthly beta () of the return of the company
Tesla compared with the return of the S&P 500.
=
=
e. What is the performance of the stock price of the company TESLA?
(2) Underperform / (2) Overperform
f. What is the systematic risk of the company TESLA?
(2) Low systematic risk / (2) Fair systematic risk/ (3) High systematic risk
Q1d - f: Write your answer as a thirteen-digit number
(Ignore the full stop)
- . 2
. 5
. 6
. 6
Q1a
Q1b Q1c Q1a
Question 2
a) What is the 3-year Fed Funds Rate on 3rd March 2023?
The Fed Funds Rate is 4 .
Consider a portfolio that only holds one stock; Calculate the 3-year returns of the portfolio with the 3-year Fed
Funds Rate on 3rd March 2023 (part a) as the free-risk rate.
() = + (()− )
b) The portfolio holds a stock (K.O.) only.
i. What is the 3-year return of the portfolio (R.M.) holding the stock K.O. only?
=
ii. What is the expected return for the stock (K.O.)? The beta can obtain in Q1 part a.
()=
c) The portfolio holds a stock (TSLA) only.
iii. What is the 3-year return of the portfolio (R.M.) holding the stock TSLA only?
=
iv. What is the expected return for the stock (TSLA)? The beta can obtain in Q1 part d.
()=
Suppose that μKO is 5.26% and σKO is 6.48%, while μTSLA is 309% and σTSLA is 26.4%. Suppose also that the
coefficient of correlation, ρ, between the returns is 34%.
Show the calculations that a wide range of risk-return combinations can be achieved by putting part of your
money in the first investment and part in the second investment.
w1 w2 mean(P) s.d(P)
0.2 0.8 2 .
0 . 2
Q2: Write your answer as a twenty-one-digit number
(Ignore the full stop)
. 5 7 5
. 5 4 1
. 1 9 1
. 3 4 3
Question 3
Download the 2022 annual and quarterly earnings reports of the company Coca-Cola in the session of
Financial Data
https://investors.coca-colacompany.com/financial-information/financial-results
a. What is the average shareholder's equity (Trailing Twelve Months, TTM)?
Average (Quarterly) shareholder's equity (in the year 2022):
(Hints: Calculate the equity at the end of the period)
b. What are the last quarter and full-year net income of the year 2022?
c. Calculate the 1-year ROE of the company Coca-Cola at the end of the year 2022
ROE (TTM) =
Q3: Write your answer as a thirteen-digit number
2 5 . 5 Billion
Net income of the last quarters: 1 Billion
Net income for the full year: 2 Billion
. 4 %
Question 4
A bank has agreed to underwrite an issue of 100 million shares by XYZ Corporation. In negotiations between
the bank and the corporation, the target price to be received by the corporation has been set at $40 per share.
The corporation is expecting to raise $4 billion in total. The bank can either offer the client a best effort or a
firm commitment arrangement.
a) What is the bank profit if best efforts where it charges a fee of $0.40 per share sold, assuming all
shares are sold?
$ million
b) What is the bank's profit if it can offer a firm commitment where it agrees to buy the shares from XYZ
corporation for $40 per share? As part of its procedures for assessing risk, it considers two alternative
scenarios. Under the first scenario, it can obtain a price of $42 per share; under the second scenario,
it is able to obtain only $37 per share.
For the first scenario with a price of $42 per share:
(1) + / (0) - $ Million
For the second scenario with a price of $37 per share:
(1) + / (0) - $ Million
The company XYZ decides to use the Dutch auction approach. The bidders are shown in the table below.
Bidder No of Shares Price Priority
A 15,000,000 $40.00 5
B 10,000,000 $43.00 1
C 6,000,000 $38.00 6
D 15,000,000 $41.00 4
E 25,000,000 $41.50 3
F 30,000,000 $42.00 2
G 25,000,000 $37.00 7
H 10,000,000 $30.00 8
c) How many shares were allocated to bidder C?
0 0 K
Q4: Write your answer as a twelve-digit number
Question 5
What is an insurance company's break-even premium for $100,000 of 3-year term life insurance for a woman of
average health age 65 in 2020 in Hong Kong?
Hong Kong Life Table
https://www.censtatd.gov.hk/en/web_table.html?id=115-01021
• The interest rate is 4.6 % p.a (with semiannual compounding)
• The payout occurs halfway through the year.
a) What is the present value of the paid to the beneficiary on average?
Age 65.5 4 . 5 7
Age 66.5 4 . 5 8
Age 67.5 4 . 4 7
Total P.V. of payout 1 4 . 6 2
b) What is the payment in each period?
First payment X
Second payment 0 . X
Age 67.5 0 . X
c) What is the break-even premium payment?
X = 3
Q5: Write your answer as a fifteen-digit number
Question 6
Consider the return on a Hedge Fund Investment with a Hurdle Rate.
A Hedge Fund In its first year
Initial investment $200 million
Fee Schedule 2% plus 20%
Hurdle rate 5%
Capital earnings 30% return
a) Calculate the management fee.
Management fee = $ million
b) Calculate the incentive fee.
Incentive Fee = $ . 2 million
c) Calculate the total fee.
Total Fee = $ . 2 million
d) Calculate the return on the hedge fund.
The return on the hedge fund = . 4 %
Q6: Write your answer as a six-digit number
Question 7
Given the close price of the stock Tencent (HKEX:700) from 1/09/2022 to 30/11/2022
Date Close Price Date Close Price
Date Close Price
01/09/2022 324.6 03/10/2022 250.55
02/11/2022 219.02
02/09/2022 328.6 05/10/2022 264.99
03/11/2022 210.28
05/09/2022 319 06/10/2022 263.85
04/11/2022 226.62
06/09/2022 314.2 07/10/2022 257.01
07/11/2022 233.08
07/09/2022 311.6 10/10/2022 250.55
08/11/2022 233.46
08/09/2022 301.8 11/10/2022 241.81
09/11/2022 224.91
09/09/2022 307 12/10/2022 240.86
10/11/2022 219.78
13/09/2022 304.8 13/10/2022 233.84
11/11/2022 245.42
14/09/2022 299.6 14/10/2022 236.69
14/11/2022 247.51
15/09/2022 300 17/10/2022 234.79
15/11/2022 273.54
16/09/2022 293.2 18/10/2022 241.62
16/11/2022 279.62
19/09/2022 289 19/10/2022 231.75
17/11/2022 277.34
20/09/2022 293.4 20/10/2022 220.73
18/11/2022 273.35
21/09/2022 286 21/10/2022 221.11
21/11/2022 268.98
22/09/2022 283 24/10/2022 195.84
22/11/2022 263.47
23/09/2022 275 25/10/2022 196.03
23/11/2022 267.84
26/09/2022 283.2 26/10/2022 200.97
24/11/2022 266.32
27/09/2022 280.8 27/10/2022 202.49
25/11/2022 259.29
28/09/2022 274 28/10/2022 190.72
28/11/2022 256.44
29/09/2022 270.6 31/10/2022 195.27
29/11/2022 271.45
30/09/2022 266.4 01/11/2022 215.98
30/11/2022 272.78
Initial margin requirement is 50%
Maintained margin is 25%
a) A Trader held HK$1,750,000 in a margin account after he bought 10,000 shares of (HKEX:700) Tencent
at HK$320 on 1st September 2022. Unfortunately, the stock price went down to HK$190.72 on 28th
October 2022. But., the price rebounded up to HK$272.78 at the end of November.
i) When was the margin call made (the end of the day)?
Date:
ii) How much extra money does he provide to bring the balance up to the required level?
(The administration cost was not considered)
Extra money required for the margin call:
b) The trader provides an extra $500,000 due to a margin call. He sold out all shares at $200 on 31/10/2022,
i) What is the maximum number of shares to be sold (short sell) after he sold out all shares on
31/10/2022?
Number of shares: 0 0
c) He sold 3,200 shares (short sell) of (HKEX:700) Tencent at HK$200 on 31/10/2022.
ii) When was the margin call made again (at the end of the day)?
Date:
iii) How much extra money does he provide to bring the balance up to the required level?
(The administration cost was not considered)
Extra money required for the margin call:
iv) He decided to close all positions at 233.5 on 8/11/2022 without providing extra money. What is
the total loss (from 1st September)?
0 5 6
Q7: Write your answer as a twenty-digit number
/ / 2 0 2 2
d d m m y y y y
0 0
/ / 2 0 2 2
6 0
Question 8
A trader holds the stock K.O. with position 200 in February. He expected that the price would not be higher than
$65 in Mid-Jun. Then he decided to trade an option (Covered called) to earn the premium.
The strike price is $65. The premium is the mid-price of the bid-ask price, and the number of positions is 2.
a) What is the type of option? (1) Long Call / (2) Short Call / (3) Long Put / (4) Short Put
b) What is the option's moneyness?
(1) In-the-money / (2) At-the-money / (3) Out-of-money
c) What is the break-even point of the option?
d) If the option will not be executed at the expiration date, how much premium in total he receive?
(Ignore the administration cost)
Q8 Write your answer as an eight-digit number