Recent Question/Assignment
Business Finance
BAO5534
Assignment Semester 1 2014
Introduction
The focus of this assignment is on risk, return and equity analysis. The expectation is that students will develop skills in measuring returns, risk assessment and analysis and valuation. Students are required to use the data provided in the case problem and exhibits to answer a series of questions.
Assignment Components
The exhibits contain financial information on Swagman Ltd, Gaslight Ltd and Airspace Ltd. It also contains return information and dividend information for two Stocks Axel Ltd, Titan Ltd, and the share market index.
Required:
You will be required to complete this assignment in teams of two or three. It is important that you form your teams as soon as possible. WebCT can be used to identify other students who are seeking partners for a team. We can make announcements prior to the lecture to alert other students without a team to meet after the class. Team members do not need to be in the same tutorial.
Please note that under NO circumstances will we allow assignments to be submitted by individuals (This is a group assignment).
Note that marks will be deducted for poor presentation. Assignments should be stapled in the top left hand corner. Please do not submit assignments in folders. It is also a requirement that all assignments be submitted with a cover sheet. This cover sheet is now specific to this subject and a copy will be provided on WebCT. Assignments will not be accepted or marked if they are lodged without this cover sheet. Please ensure that you assignment is appropriately referenced and note that marks will be deducted if there is no or incorrect referencing.
The assignment requires each team to undertake independent work. No further assistance will be provided to teams in completing the assignment.
The assignment accounts for 15% of the subject’s assessment.
Assignment Presentation
• Students are expected to complete the calculations to the questions in the assignment. This will require the development of a spreadsheet and the creation of formulas. The excel specialist functions cannot be used to calculate any answers. You are required to develop your own formulas, within the spreadsheet, to complete all the necessary calculations.
• Do not submit your assignment in folders.
• NOTE: Your answers should be clearly labeled on an answer sheet(s) by reference to the question number, with any further supporting calculations referenced to an appendix.
Assignment Submission
A hardcopy of your assignment must be submitted with a signed assignment cover sheet on Wednesday 14 May. Late submissions will be penalised 2 marks for each day that the assignment is overdue.
CASE PROBLEM
National Financial Advisors (NFA) served a diverse set of clients, some of whom were quite sophisticated, financially, and others who were just starting to invest. The company had been founded almost ten years ago after Dr Michael Ntalianis and his college roommate had set up shop in a two-bedroom storefront. The roommate had soon decided that the financial services industry was not tangible for his tastes, but Dr Ntalianis had found plenty of bright young minds to come aboard in the meantime. As the firm grew, Dr Ntalianis developed a reputation for training his associates and helping them establish themselves in the business. Dr Ntalianis’ personal reputation for honesty and fair dealing benefited the firm’s reputation, and NFA had built a large customer base during its short life.
THE SENIOR TEAM
Most employees had become used to long hours at work and the extra reading and assignments that Dr Ntalianis constantly asked them to work on. They all realized that they still had a lot to learn about financial services, and finance in general, and they all looked forward to each assignment.
Recently, Dr Ntalianis had asked several senior employees (Senior Team) to develop a presentation and a set of educational materials regarding the different types of risks that investors might face when placing their money with the firm. Some of the information that they had collected for this assignment was rather rudimentary, but the difficulty of the task came in explaining things clearly to investors.
The team’s assignment had come about when one of Dr Ntalianis’ longtime associates had relayed a question from a client: what is this whole risk thing, anyway? There was no simple way to answer this question, unfortunately, but Dr Ntalianis had asked his team to break it down into its simplest components and figure out a way to show clients how risk was treated in the financial markets and when making investment decisions. The presentation could be as basic or as complex as the team felt was necessary.
According to Dr Ntalianis, there were two ways to understand how risk could be measured in conjunction with an investor’s portfolio, or risk could be measured, in a traditional sense, as the chance of loss on some project or single investment. He had stressed that the team would have to work out these two different meanings of risk in the presentation and make sense of each. In addition, Dr Ntalianis was concerned that the techniques used in finance appeared to be complicated and tedious, and he wanted this presentation to point out an example of each concept discussed and demonstrate how the techniques actually made sense when considered carefully. It was Dr Ntalianis’ belief that even the most sophisticated clients could benefit from a good example now and then.
BY THE NUMBERS
Dr Ntalianis had provided several sets of numbers for the team to use in the presentation. The first set was a group of returns for three different stocks, classified by the type of economy that these stocks might face in the future and the return each was likely to experience in the different situations (Exhibit 1). To be conservative, each future scenario was considered to be equally likely. Dr Ntalianis was convinced that there was some way to measure and compare the risks of these potential investments, together and as separate purchases, but he suggested that the team might have to be creative when coming up with such a measure.
In addition to measures of risk for individual stocks and/or projects, Dr Ntalianis wanted the presentation to deal with how investors measured risk when a portfolio was being considered. Dr Ntalianis pulled some representative numbers from the Internet: annualized monthly returns for the market index and two different stocks (Exhibit 2). He indicated to the team that the proper measure of risk for a portfolio would have to be calculated using this kind of data series.
Exhibit 1: Probable returns for several different investments.
Economic situation Probabilities Swagman Ltd Gaslight Ltd Airspace Ltd
Recession 25% -2.00% 2.54% 15.46%
No change 25% 6.57% 4.35% 7.50%
Growth 25% 9.21% 6.78% 4.60%
Boom 25% 14.50% 9.71% 1.54%
Historical Correlations
Swagman & Gaslight 0.357
Gaslight & Airspace -0.275
Swagman & Airspace -0.071
Exhibit 2: Annualised Monthly Returns for the Market Index and Two Traded Stocks (Axel & Titan).
Month Market index (%) Axel Ltd (%) Titan Ltd (%)
1 5.08 2.37 1.05
2 5.08 1.37 11.90
3 5.50 1.30 -1.50
4 1.19 7.71 -7.37
5 -1.79 1.14 13.26
6 -1.62 1.51 -0.70
7 -1.13 6.29 6.42
8 5.09 3.88 9.87
9 8.10 8.26 -0.47
10 0.84 0.61 -3.17
11 1.70 0.12 5.12
12 2.74 0.90 -15.58
13 6.03 10.83 18.81
14 5.71 10.31 9.84
15 8.64 35.37 -2.12
16 11.00 22.64 -10.67
17 0.49 7.31 -7.72
18 7.90 2.22 -17.83
19 7.25 10.51 -1.84
20 0.88 3.76 3.44
21 6.17 19.47 -1.31
22 3.67 5.99 2.23
23 2.08 8.93 7.42
24 1.56 10.81 2.10
Exhibit 3
Dividend History: Annual dividends paid for the last 6 years.
Axel Ltd Titan Ltd
$1.00 $2.00
$1.02 $2.04
$1.04 $2.08
$1.06 $2.10
$1.08 $2.12
$1.10 $2.14
Questions
Dr Ntalianis has instructed the team to specifically answer all of the following questions:
1. Using the information given in Exhibit 1, determine expected return for each investment for the next period. In addition, find the standard deviation of return for each investment.
2. Using your answer to 1, above, and assuming that investors can only invest in one of the three alternatives in Exhibit 1, use expected return and standard deviation to determine which alternative would be the most appropriate for a risk-averse investor. Justify your method of selection.
3. Determine the expected return and standard deviation of a two-asset portfolio comprised of Swagman and Gaslight shares, Swagman and Airspace shares, and Gaslight and Airspace shares. Assume equal weightings of each share within each portfolio.
4. Determine the expected return and standard deviation of a three-asset portfolio comprised of Swagman, Gaslight and Airspace shares. Assume equal weightings of each share within the portfolio. Why is the computation more complex than a portfolio comprising of only two shares?
5. Use the numbers in Exhibit 2 to determine the average return, variance and standard deviation for Axel Ltd, Titan Ltd and the market index.
6. Use the numbers in Exhibit 2 to determine the systematic risk (Beta) of both Axel and Titan Ltd.
7. Which measure, beta or standard deviation, is more useful when analyzing stocks that are placed in a diversified portfolio? Provide justification for your answer.
8. Use the capital asset pricing model to calculate the required rate of return for both Axel and Titan Ltd. Assume the risk-free rate of return is 6%. Define what is meant by the required rate of return.
9. Utilising the required rates of return calculated in question 8 above and the historical dividend information in exhibit 3; calculate the intrinsic value for both Axel and Titan Ltd. List all assumptions that you make to form your valuation.
BAO5534
Assignment Semester 1 2014
Introduction
The focus of this assignment is on risk, return and equity analysis. The expectation is that students will develop skills in measuring returns, risk assessment and analysis and valuation. Students are required to use the data provided in the case problem and exhibits to answer a series of questions.
Assignment Components
The exhibits contain financial information on Swagman Ltd, Gaslight Ltd and Airspace Ltd. It also contains return information and dividend information for two Stocks Axel Ltd, Titan Ltd, and the share market index.
Required:
You will be required to complete this assignment in teams of two or three. It is important that you form your teams as soon as possible. WebCT can be used to identify other students who are seeking partners for a team. We can make announcements prior to the lecture to alert other students without a team to meet after the class. Team members do not need to be in the same tutorial.
Please note that under NO circumstances will we allow assignments to be submitted by individuals (This is a group assignment).
Note that marks will be deducted for poor presentation. Assignments should be stapled in the top left hand corner. Please do not submit assignments in folders. It is also a requirement that all assignments be submitted with a cover sheet. This cover sheet is now specific to this subject and a copy will be provided on WebCT. Assignments will not be accepted or marked if they are lodged without this cover sheet. Please ensure that you assignment is appropriately referenced and note that marks will be deducted if there is no or incorrect referencing.
The assignment requires each team to undertake independent work. No further assistance will be provided to teams in completing the assignment.
The assignment accounts for 15% of the subject’s assessment.
Assignment Presentation
• Students are expected to complete the calculations to the questions in the assignment. This will require the development of a spreadsheet and the creation of formulas. The excel specialist functions cannot be used to calculate any answers. You are required to develop your own formulas, within the spreadsheet, to complete all the necessary calculations.
• Do not submit your assignment in folders.
• NOTE: Your answers should be clearly labeled on an answer sheet(s) by reference to the question number, with any further supporting calculations referenced to an appendix.
Assignment Submission
A hardcopy of your assignment must be submitted with a signed assignment cover sheet on Wednesday 14 May. Late submissions will be penalised 2 marks for each day that the assignment is overdue.
CASE PROBLEM
National Financial Advisors (NFA) served a diverse set of clients, some of whom were quite sophisticated, financially, and others who were just starting to invest. The company had been founded almost ten years ago after Dr Michael Ntalianis and his college roommate had set up shop in a two-bedroom storefront. The roommate had soon decided that the financial services industry was not tangible for his tastes, but Dr Ntalianis had found plenty of bright young minds to come aboard in the meantime. As the firm grew, Dr Ntalianis developed a reputation for training his associates and helping them establish themselves in the business. Dr Ntalianis’ personal reputation for honesty and fair dealing benefited the firm’s reputation, and NFA had built a large customer base during its short life.
THE SENIOR TEAM
Most employees had become used to long hours at work and the extra reading and assignments that Dr Ntalianis constantly asked them to work on. They all realized that they still had a lot to learn about financial services, and finance in general, and they all looked forward to each assignment.
Recently, Dr Ntalianis had asked several senior employees (Senior Team) to develop a presentation and a set of educational materials regarding the different types of risks that investors might face when placing their money with the firm. Some of the information that they had collected for this assignment was rather rudimentary, but the difficulty of the task came in explaining things clearly to investors.
The team’s assignment had come about when one of Dr Ntalianis’ longtime associates had relayed a question from a client: what is this whole risk thing, anyway? There was no simple way to answer this question, unfortunately, but Dr Ntalianis had asked his team to break it down into its simplest components and figure out a way to show clients how risk was treated in the financial markets and when making investment decisions. The presentation could be as basic or as complex as the team felt was necessary.
According to Dr Ntalianis, there were two ways to understand how risk could be measured in conjunction with an investor’s portfolio, or risk could be measured, in a traditional sense, as the chance of loss on some project or single investment. He had stressed that the team would have to work out these two different meanings of risk in the presentation and make sense of each. In addition, Dr Ntalianis was concerned that the techniques used in finance appeared to be complicated and tedious, and he wanted this presentation to point out an example of each concept discussed and demonstrate how the techniques actually made sense when considered carefully. It was Dr Ntalianis’ belief that even the most sophisticated clients could benefit from a good example now and then.
BY THE NUMBERS
Dr Ntalianis had provided several sets of numbers for the team to use in the presentation. The first set was a group of returns for three different stocks, classified by the type of economy that these stocks might face in the future and the return each was likely to experience in the different situations (Exhibit 1). To be conservative, each future scenario was considered to be equally likely. Dr Ntalianis was convinced that there was some way to measure and compare the risks of these potential investments, together and as separate purchases, but he suggested that the team might have to be creative when coming up with such a measure.
In addition to measures of risk for individual stocks and/or projects, Dr Ntalianis wanted the presentation to deal with how investors measured risk when a portfolio was being considered. Dr Ntalianis pulled some representative numbers from the Internet: annualized monthly returns for the market index and two different stocks (Exhibit 2). He indicated to the team that the proper measure of risk for a portfolio would have to be calculated using this kind of data series.
Exhibit 1: Probable returns for several different investments.
Economic situation Probabilities Swagman Ltd Gaslight Ltd Airspace Ltd
Recession 25% -2.00% 2.54% 15.46%
No change 25% 6.57% 4.35% 7.50%
Growth 25% 9.21% 6.78% 4.60%
Boom 25% 14.50% 9.71% 1.54%
Historical Correlations
Swagman & Gaslight 0.357
Gaslight & Airspace -0.275
Swagman & Airspace -0.071
Exhibit 2: Annualised Monthly Returns for the Market Index and Two Traded Stocks (Axel & Titan).
Month Market index (%) Axel Ltd (%) Titan Ltd (%)
1 5.08 2.37 1.05
2 5.08 1.37 11.90
3 5.50 1.30 -1.50
4 1.19 7.71 -7.37
5 -1.79 1.14 13.26
6 -1.62 1.51 -0.70
7 -1.13 6.29 6.42
8 5.09 3.88 9.87
9 8.10 8.26 -0.47
10 0.84 0.61 -3.17
11 1.70 0.12 5.12
12 2.74 0.90 -15.58
13 6.03 10.83 18.81
14 5.71 10.31 9.84
15 8.64 35.37 -2.12
16 11.00 22.64 -10.67
17 0.49 7.31 -7.72
18 7.90 2.22 -17.83
19 7.25 10.51 -1.84
20 0.88 3.76 3.44
21 6.17 19.47 -1.31
22 3.67 5.99 2.23
23 2.08 8.93 7.42
24 1.56 10.81 2.10
Exhibit 3
Dividend History: Annual dividends paid for the last 6 years.
Axel Ltd Titan Ltd
$1.00 $2.00
$1.02 $2.04
$1.04 $2.08
$1.06 $2.10
$1.08 $2.12
$1.10 $2.14
Questions
Dr Ntalianis has instructed the team to specifically answer all of the following questions:
1. Using the information given in Exhibit 1, determine expected return for each investment for the next period. In addition, find the standard deviation of return for each investment.
2. Using your answer to 1, above, and assuming that investors can only invest in one of the three alternatives in Exhibit 1, use expected return and standard deviation to determine which alternative would be the most appropriate for a risk-averse investor. Justify your method of selection.
3. Determine the expected return and standard deviation of a two-asset portfolio comprised of Swagman and Gaslight shares, Swagman and Airspace shares, and Gaslight and Airspace shares. Assume equal weightings of each share within each portfolio.
4. Determine the expected return and standard deviation of a three-asset portfolio comprised of Swagman, Gaslight and Airspace shares. Assume equal weightings of each share within the portfolio. Why is the computation more complex than a portfolio comprising of only two shares?
5. Use the numbers in Exhibit 2 to determine the average return, variance and standard deviation for Axel Ltd, Titan Ltd and the market index.
6. Use the numbers in Exhibit 2 to determine the systematic risk (Beta) of both Axel and Titan Ltd.
7. Which measure, beta or standard deviation, is more useful when analyzing stocks that are placed in a diversified portfolio? Provide justification for your answer.
8. Use the capital asset pricing model to calculate the required rate of return for both Axel and Titan Ltd. Assume the risk-free rate of return is 6%. Define what is meant by the required rate of return.
9. Utilising the required rates of return calculated in question 8 above and the historical dividend information in exhibit 3; calculate the intrinsic value for both Axel and Titan Ltd. List all assumptions that you make to form your valuation.
Looking for answers ?
Recent Questions
Program: Master of Information SystemsAssessment 1: Portfolio 1 (Session 2 Topic: Input, Processing andOutput) Semester 2: Block 8-2024Course Code: MBIS4003 Course Title: Software Development Total Marks:...AssessmentAssessment item 2—Assignment 2Due date 11:45pm on Sunday, 24Nov.2024Weighting 35%Length Not applicableObjectivesThis assessment item relates to the unit learning outcomes numbers 1, 2 and 3 as...Plan, construct and write a long-form essay on a particular area of media research that interests you. Using an established theoretical framework, explain how your research offers new insights into the...DescriptionIn this assessment, you are required to demonstrate that you understand how an Older Adult can develop mental health problems associated with cognitive decline leading to cognitive impairment...School of Engineering, Design and Built EnvironmentENGR7008 Fire Engineering Design and AssessmentAssignment 4: Peer Review of Fire Engineering ReportASSIGNMENT 4PEER REVIEW OF A FIRE ENGINEERING REPORTSee...Structural Analysis Etask 5The aim of this assessment task is to evaluate the appropriate use of the Force Method and Moment Distribution Method for structural analysis• Please download the eTask4 from...Purpose:The purpose of this task is for the student to demonstrate how to create a holistic plan of care that is person-centred, trauma-informed, and recovery-oriented in focus.Description:In this written...Show All Questions