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BFF2701 Equity Markets

Tutorial 7 Questions

Question 1

You have received an order to buy stock in CBA. Over the next two minutes the following series of trades take place. Your buy trades are marked with *.

a) What is the VWAP of your buy transactions for that interval?

b) How do your buy transactions compare with prices traded for CBA during that interval?

Question 2 (Teall (2022) Q10.3)

The following table provides historical percentage returns for the Patterson and Listonl Funds along with percentage returns on the market portfolio (index or fund):

Suppose that the riskless rate of return (or T-Bill rate) was 3% for each year. Calculate the following based on the preceding table:

a) Mean historical returns for the two funds and the market portfolio.

b) Variances associated with Patterson Fund returns and Liston Fund returns along with returns on the market portfolio.

c) The historical covariance and coefficient of correlation between returns of the Patterson Fund and returns on the market portfolio.

d) The historical covariance and coefficient of correlation between returns of the Liston Fund and returns on the market portfolio.

e) Historical betas for Patterson and Liston Funds, based on five years of returns data. (Note that the data sets are too limited in size to be considered very reliable.)

f) Suppose that a market return of 8% was obtained in the year 2017, and that the riskless return for 2017 was 3%. Further suppose that the Patterson and Liston Funds earned 10% and 14%, respectively, over 2017. Based on a Treynor Index, how did each of these funds perform relative to the market?

g) Comment on the 2017 risk-adjusted performance for each of the two funds based on Treynor Index results.

Question 3 (Teall (2022) Q10.4)

Historical returns for the Ripco Fund and the market portfolio along with Treasury bill (T-Bill) rates (r) are summarized in the following table:

a. Calculate the fund beta over the 20-vear period.

b. Calculate Jensen's alpha for the fund over the 20-year period. Did the fund outperform the market during this period based on Jensen's alpha?

Question 4 Calculating implementation shortfall

Assume that at 09:15am, the share price of JB Hi-Fi (ASX.JBH) is $60 per share, and we decide to buy 10,000 shares.

At 09:20, the broker starts to place orders. At this moment, the stock price has gone up to $60.2. The broker executed the orders in 4 separate schedules as follows:

Due to the increased price, the broker gives up trading the remaining shares.

At the end of the day, the closing price of JBH is $60.8 The commission to the broker is $0.2 per share.

- Calculate the implementation shortfall

Question 5 (Teall (2022) Q10.7)

a. On what factors does implementation shortfall depend? That is, what affects the various types of implementation costs?

b. Why might increasing the speed at which a large transaction is executed increase the implementation shortfall of an order?

c. Why might decreasing the speed at which a large transaction is executed increase the implementation shortfall of an order?