Financial economics

Financial economics
General instructions
How should your answer be? The general format is that you should have in mind that you write a very short paper where you show your results and also discuss them. Remember to also support your assumptions and calculations with references.
• You get some hints and suggestions on what to focus on but you can choose your “own” style of analysis.
• You must comment your results/answers, why does it look like it does, what are the implications. Which stock should I choose and why.
• Your reports (in form of a written document) are to be uploaded at Fronter.
• Make sure that it is easy to understand what you have done, i.e. if tasks involve several
steps, it is sometimes important to show all or some of the steps, e.g. intermediate
results.
• No late hand in of assignment.
Data
The data set contains 63 (Swedish) stocks, Swedish stock index and the Swedish risk free return (short-term government T-bills). Except the name the general sector the firm is included in the headings.

Framing:
You are CFO (Chief Financial Officer) at the Swedish firm Volvo AB and also member of the management team of the firm responsible for all long-term strategic decisions.
Your First Problem
The firm’s occupational pension plans future prospects, which consists of money set off by the firm to an external institution. What should be in it and what should employees expect? You are afraid that your employees will not make efficient choices if you allow them to allocate their personal funds completely free. (you may want to have a look at Jay Ritters article that is supplied) Therefore you are thinking about making some base investment products to choose from in order to assure that they will have efficient pensions plans.
How will you construct the plan given that the assets in the Dataset supplied are the ones available? What would the Risk and expected return be for the next year on your plan?
Some line of thought is what is your risk as employee at Volvo how does this risk correspond with the pension plan. What about diversification: i.e. many or few assets? Some tools could be to look at expected return to beta-risk or standard deviation of the expected return. (i.e. you could both plot expected return against standard deviation or beta and also look at the ratios

and then also look at the excess return (expected return minus risk free rate) to the risk (beta or standard deviation)).
Your Second Problem
Management team has ideas to enroll in a Venture capital project. This project is not in the regular sector Volvo is active in but instead it is in the Consumer Goods sector.
The projects estimated cash-flows are as described below. What discount rate should you use, why? What would be possible choices to your preferred choice of discount rate? Should you perform the project or back out? Is this the case for an alternative discount rate? Remember the “Capital Asset Pricing Model” CAPM.
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