Questions:
The focus of this assignment is on Risk and Return. The expectation is that students will develop technical skills in measuring returns, risk assessment and analysis.
Assignment Components
The exhibit contains monthly returns for Financial Ltd, Construction Ltd and the Stock Market index.
Table 1: Monthly Values for the Market Index and Two Traded Shares.
|
Month
|
Market index
|
Financial Ltd ($)
|
Construction Ltd ($)
|
|
1
|
4650
|
13.05
|
8.00
|
|
2
|
4770
|
13.40
|
7.60
|
|
3
|
4840
|
13.87
|
7.00
|
|
4
|
4940
|
13.12
|
7.70
|
|
5
|
4815
|
13.37
|
8.10
|
|
6
|
4788
|
13.00
|
8.60
|
|
7
|
5055
|
13.50
|
8.30
|
|
8
|
5125
|
13.90
|
8.90
|
|
9
|
5035
|
14.12
|
9.70
|
|
10
|
5115
|
14.87
|
10.20
|
|
11
|
5200
|
15.25
|
10.65
|
|
12
|
5255
|
16.05
|
11.05
|
|
13
|
5305
|
16.40
|
11.45
|
|
14
|
5408
|
16.00
|
10.95
|
|
15
|
5510
|
16.25
|
10.55
|
|
16
|
5430
|
16.50
|
11.00
|
|
17
|
5360
|
17.00
|
10.55
|
|
18
|
5420
|
17.35
|
10.10
|
|
19
|
5490
|
18.00
|
10.70
|
|
20
|
5555
|
18.35
|
9.45
|
|
21
|
5500
|
18.55
|
10.12
|
|
22
|
5575
|
19.20
|
10.45
|
|
23
|
5645
|
18.70
|
10.05
|
|
24
|
5695
|
18.20
|
10.85
|
|
25
|
5770
|
18.75
|
11.15
|
Table 2: Previous 5-year Dividend History for the two Listed Companies
|
Financial Ltd
|
Construction Ltd
|
|
1.00
|
0.60
|
|
1.03
|
0.62
|
|
1.07
|
0.66
|
|
1.11
|
0.70
|
|
1.15
|
0.74
|
Tasks
Each team is required to make the following calculations using the statistical functions on Excel:
- Convert the price data into returns on a month to month basis. You should have 24 returns for the market and the two shares after you complete this process.
- Mean (expected) return and standard deviation for the stock market and the two companies.
- The coefficient of variation for the market and the two companies.
- The correlation coefficient between Financial and Construction Ltd.
- The standard deviation of returns for a portfolio consisting of Financial Ltd and Construction Ltd (assume equal weightings).
- Beta coefficient calculation for both Financial and Construction Ltd return of market each individual.
- Assuming a risk-free rate of 3% and utilizing the information in both tables use the dividend valuation model to determine the present value of the two shares.Capital n dividend does the evaluation w3
Answers:
1.
| Month |
Market Index |
Financial Ltd |
Construction Ltd |
| Index Points |
Share Returns |
Share Price ($) |
Share Returns |
Share Price ($) |
Share Returns |
| 1 |
4650 |
|
13.05 |
|
8.00 |
|
| 2 |
4770 |
2.581% |
13.40 |
2.682% |
7.60 |
-5.000% |
| 3 |
4840 |
1.468% |
13.87 |
3.507% |
7.00 |
-7.895% |
| 4 |
4940 |
2.066% |
13.12 |
-5.407% |
7.70 |
10.000% |
| 5 |
4815 |
-2.530% |
13.37 |
1.905% |
8.10 |
5.195% |
| 6 |
4788 |
-0.561% |
13.00 |
-2.767% |
8.60 |
6.173% |
| 7 |
5055 |
5.576% |
13.50 |
3.846% |
8.30 |
-3.488% |
| 8 |
5125 |
1.385% |
13.90 |
2.963% |
8.90 |
7.229% |
| 9 |
5035 |
-1.756% |
14.12 |
1.583% |
9.70 |
8.989% |
| 10 |
5115 |
1.589% |
14.87 |
5.312% |
10.20 |
5.155% |
| 11 |
5200 |
1.662% |
15.25 |
2.555% |
10.65 |
4.412% |
| 12 |
5255 |
1.058% |
16.05 |
5.246% |
11.05 |
3.756% |
| 13 |
5305 |
0.951% |
16.40 |
2.181% |
11.45 |
3.620% |
| 14 |
5408 |
1.942% |
16.00 |
-2.439% |
10.95 |
-4.367% |
| 15 |
5510 |
1.886% |
16.25 |
1.563% |
10.55 |
-3.653% |
| 16 |
5430 |
-1.452% |
16.50 |
1.538% |
11.00 |
4.265% |
| 17 |
5360 |
-1.289% |
17.00 |
3.030% |
10.55 |
-4.091% |
| 18 |
5420 |
1.119% |
17.35 |
2.059% |
10.10 |
-4.265% |
| 19 |
5490 |
1.292% |
18.00 |
3.746% |
10.70 |
5.941% |
| 20 |
5555 |
1.184% |
18.35 |
1.944% |
9.45 |
-11.682% |
| 21 |
5500 |
-0.990% |
18.55 |
1.090% |
10.12 |
7.090% |
| 22 |
5575 |
1.364% |
19.20 |
3.504% |
10.45 |
3.261% |
| 23 |
5645 |
1.256% |
18.70 |
-2.604% |
10.05 |
-3.828% |
| 24 |
5695 |
0.886% |
18.20 |
-2.674% |
10.85 |
7.960% |
| 25 |
5770 |
1.317% |
18.75 |
3.022% |
11.15 |
2.765% |
2.
| Month |
Market Index |
Financial Ltd |
Construction Ltd |
| Index Points |
Share Returns |
Share Price ($) |
Share Returns |
Share Price ($) |
Share Returns |
| 1 |
4650 |
|
13.05 |
|
8.00 |
|
| 2 |
4770 |
2.581% |
13.40 |
2.682% |
7.60 |
-5.000% |
| 3 |
4840 |
1.468% |
13.87 |
3.507% |
7.00 |
-7.895% |
| 4 |
4940 |
2.066% |
13.12 |
-5.407% |
7.70 |
10.000% |
| 5 |
4815 |
-2.530% |
13.37 |
1.905% |
8.10 |
5.195% |
| 6 |
4788 |
-0.561% |
13.00 |
-2.767% |
8.60 |
6.173% |
| 7 |
5055 |
5.576% |
13.50 |
3.846% |
8.30 |
-3.488% |
| 8 |
5125 |
1.385% |
13.90 |
2.963% |
8.90 |
7.229% |
| 9 |
5035 |
-1.756% |
14.12 |
1.583% |
9.70 |
8.989% |
| 10 |
5115 |
1.589% |
14.87 |
5.312% |
10.20 |
5.155% |
| 11 |
5200 |
1.662% |
15.25 |
2.555% |
10.65 |
4.412% |
| 12 |
5255 |
1.058% |
16.05 |
5.246% |
11.05 |
3.756% |
| 13 |
5305 |
0.951% |
16.40 |
2.181% |
11.45 |
3.620% |
| 14 |
5408 |
1.942% |
16.00 |
-2.439% |
10.95 |
-4.367% |
| 15 |
5510 |
1.886% |
16.25 |
1.563% |
10.55 |
-3.653% |
| 16 |
5430 |
-1.452% |
16.50 |
1.538% |
11.00 |
4.265% |
| 17 |
5360 |
-1.289% |
17.00 |
3.030% |
10.55 |
-4.091% |
| 18 |
5420 |
1.119% |
17.35 |
2.059% |
10.10 |
-4.265% |
| 19 |
5490 |
1.292% |
18.00 |
3.746% |
10.70 |
5.941% |
| 20 |
5555 |
1.184% |
18.35 |
1.944% |
9.45 |
-11.682% |
| 21 |
5500 |
-0.990% |
18.55 |
1.090% |
10.12 |
7.090% |
| 22 |
5575 |
1.364% |
19.20 |
3.504% |
10.45 |
3.261% |
| 23 |
5645 |
1.256% |
18.70 |
-2.604% |
10.05 |
-3.828% |
| 24 |
5695 |
0.886% |
18.20 |
-2.674% |
10.85 |
7.960% |
| 25 |
5770 |
1.317% |
18.75 |
3.022% |
11.15 |
2.765% |
| Mean (expected) in annual term |
11.001% |
|
18.693% |
|
18.770% |
| Standard Deviation |
1.686% |
|
2.746% |
|
5.956% |
3.
| Month |
Market Index |
Financial Ltd |
Construction Ltd |
| Index Points |
Share Returns |
Share Price ($) |
Share Returns |
Share Price ($) |
Share Returns |
| 1 |
4650 |
|
13.05 |
|
8.00 |
|
| 2 |
4770 |
2.581% |
13.40 |
2.682% |
7.60 |
-5.000% |
| 3 |
4840 |
1.468% |
13.87 |
3.507% |
7.00 |
-7.895% |
| 4 |
4940 |
2.066% |
13.12 |
-5.407% |
7.70 |
10.000% |
| 5 |
4815 |
-2.530% |
13.37 |
1.905% |
8.10 |
5.195% |
| 6 |
4788 |
-0.561% |
13.00 |
-2.767% |
8.60 |
6.173% |
| 7 |
5055 |
5.576% |
13.50 |
3.846% |
8.30 |
-3.488% |
| 8 |
5125 |
1.385% |
13.90 |
2.963% |
8.90 |
7.229% |
| 9 |
5035 |
-1.756% |
14.12 |
1.583% |
9.70 |
8.989% |
| 10 |
5115 |
1.589% |
14.87 |
5.312% |
10.20 |
5.155% |
| 11 |
5200 |
1.662% |
15.25 |
2.555% |
10.65 |
4.412% |
| 12 |
5255 |
1.058% |
16.05 |
5.246% |
11.05 |
3.756% |
| 13 |
5305 |
0.951% |
16.40 |
2.181% |
11.45 |
3.620% |
| 14 |
5408 |
1.942% |
16.00 |
-2.439% |
10.95 |
-4.367% |
| 15 |
5510 |
1.886% |
16.25 |
1.563% |
10.55 |
-3.653% |
| 16 |
5430 |
-1.452% |
16.50 |
1.538% |
11.00 |
4.265% |
| 17 |
5360 |
-1.289% |
17.00 |
3.030% |
10.55 |
-4.091% |
| 18 |
5420 |
1.119% |
17.35 |
2.059% |
10.10 |
-4.265% |
| 19 |
5490 |
1.292% |
18.00 |
3.746% |
10.70 |
5.941% |
| 20 |
5555 |
1.184% |
18.35 |
1.944% |
9.45 |
-11.682% |
| 21 |
5500 |
-0.990% |
18.55 |
1.090% |
10.12 |
7.090% |
| 22 |
5575 |
1.364% |
19.20 |
3.504% |
10.45 |
3.261% |
| 23 |
5645 |
1.256% |
18.70 |
-2.604% |
10.05 |
-3.828% |
| 24 |
5695 |
0.886% |
18.20 |
-2.674% |
10.85 |
7.960% |
| 25 |
5770 |
1.317% |
18.75 |
3.022% |
11.15 |
2.765% |
| Mean (expected) in monthly |
0.917% |
|
1.558% |
|
1.564% |
| Mean (expected) in annually |
11.001% |
|
18.693% |
|
18.770% |
| Standard Deviation |
1.686% |
|
2.746% |
|
5.956% |
| Coefficient of Variation |
1.839 |
|
1.763 |
|
3.808 |
4.
| Month |
Market Index |
Financial Ltd |
Construction Ltd |
| Index Points |
Share Returns |
Share Price ($) |
Share Returns |
Share Price ($) |
Share Returns |
| 1 |
4650 |
|
13.05 |
|
8.00 |
|
| 2 |
4770 |
2.581% |
13.40 |
2.682% |
7.60 |
-5.000% |
| 3 |
4840 |
1.468% |
13.87 |
3.507% |
7.00 |
-7.895% |
| 4 |
4940 |
2.066% |
13.12 |
-5.407% |
7.70 |
10.000% |
| 5 |
4815 |
-2.530% |
13.37 |
1.905% |
8.10 |
5.195% |
| 6 |
4788 |
-0.561% |
13.00 |
-2.767% |
8.60 |
6.173% |
| 7 |
5055 |
5.576% |
13.50 |
3.846% |
8.30 |
-3.488% |
| 8 |
5125 |
1.385% |
13.90 |
2.963% |
8.90 |
7.229% |
| 9 |
5035 |
-1.756% |
14.12 |
1.583% |
9.70 |
8.989% |
| 10 |
5115 |
1.589% |
14.87 |
5.312% |
10.20 |
5.155% |
| 11 |
5200 |
1.662% |
15.25 |
2.555% |
10.65 |
4.412% |
| 12 |
5255 |
1.058% |
16.05 |
5.246% |
11.05 |
3.756% |
| 13 |
5305 |
0.951% |
16.40 |
2.181% |
11.45 |
3.620% |
| 14 |
5408 |
1.942% |
16.00 |
-2.439% |
10.95 |
-4.367% |
| 15 |
5510 |
1.886% |
16.25 |
1.563% |
10.55 |
-3.653% |
| 16 |
5430 |
-1.452% |
16.50 |
1.538% |
11.00 |
4.265% |
| 17 |
5360 |
-1.289% |
17.00 |
3.030% |
10.55 |
-4.091% |
| 18 |
5420 |
1.119% |
17.35 |
2.059% |
10.10 |
-4.265% |
| 19 |
5490 |
1.292% |
18.00 |
3.746% |
10.70 |
5.941% |
| 20 |
5555 |
1.184% |
18.35 |
1.944% |
9.45 |
-11.682% |
| 21 |
5500 |
-0.990% |
18.55 |
1.090% |
10.12 |
7.090% |
| 22 |
5575 |
1.364% |
19.20 |
3.504% |
10.45 |
3.261% |
| 23 |
5645 |
1.256% |
18.70 |
-2.604% |
10.05 |
-3.828% |
| 24 |
5695 |
0.886% |
18.20 |
-2.674% |
10.85 |
7.960% |
| 25 |
5770 |
1.317% |
18.75 |
3.022% |
11.15 |
2.765% |
| Correlation Coefficient between Financial Ltd and Construction Ltd |
-0.176 |
|
5.
| Month |
Market Index |
Financial Ltd |
Construction Ltd |
| Index Points |
Share Returns |
Share Price ($) |
Share Returns |
Share Price ($) |
Share Returns |
| 1 |
4650 |
|
13.05 |
|
8.00 |
|
| 2 |
4770 |
2.581% |
13.40 |
2.682% |
7.60 |
-5.000% |
| 3 |
4840 |
1.468% |
13.87 |
3.507% |
7.00 |
-7.895% |
| 4 |
4940 |
2.066% |
13.12 |
-5.407% |
7.70 |
10.000% |
| 5 |
4815 |
-2.530% |
13.37 |
1.905% |
8.10 |
5.195% |
| 6 |
4788 |
-0.561% |
13.00 |
-2.767% |
8.60 |
6.173% |
| 7 |
5055 |
5.576% |
13.50 |
3.846% |
8.30 |
-3.488% |
| 8 |
5125 |
1.385% |
13.90 |
2.963% |
8.90 |
7.229% |
| 9 |
5035 |
-1.756% |
14.12 |
1.583% |
9.70 |
8.989% |
| 10 |
5115 |
1.589% |
14.87 |
5.312% |
10.20 |
5.155% |
| 11 |
5200 |
1.662% |
15.25 |
2.555% |
10.65 |
4.412% |
| 12 |
5255 |
1.058% |
16.05 |
5.246% |
11.05 |
3.756% |
| 13 |
5305 |
0.951% |
16.40 |
2.181% |
11.45 |
3.620% |
| 14 |
5408 |
1.942% |
16.00 |
-2.439% |
10.95 |
-4.367% |
| 15 |
5510 |
1.886% |
16.25 |
1.563% |
10.55 |
-3.653% |
| 16 |
5430 |
-1.452% |
16.50 |
1.538% |
11.00 |
4.265% |
| 17 |
5360 |
-1.289% |
17.00 |
3.030% |
10.55 |
-4.091% |
| 18 |
5420 |
1.119% |
17.35 |
2.059% |
10.10 |
-4.265% |
| 19 |
5490 |
1.292% |
18.00 |
3.746% |
10.70 |
5.941% |
| 20 |
5555 |
1.184% |
18.35 |
1.944% |
9.45 |
-11.682% |
| 21 |
5500 |
-0.990% |
18.55 |
1.090% |
10.12 |
7.090% |
| 22 |
5575 |
1.364% |
19.20 |
3.504% |
10.45 |
3.261% |
| 23 |
5645 |
1.256% |
18.70 |
-2.604% |
10.05 |
-3.828% |
| 24 |
5695 |
0.886% |
18.20 |
-2.674% |
10.85 |
7.960% |
| 25 |
5770 |
1.317% |
18.75 |
3.022% |
11.15 |
2.765% |
| Standard Deviation |
1.686% |
|
2.746% |
|
5.956% |
| Correlation Coefficient between Financial Ltd and Construction Ltd |
-0.176 |
|
| SD of Portfolio b/w Financial Ltd & Construction Ltd |
3.052% |
|
6.
| Month |
Market Index |
Financial Ltd |
Construction Ltd |
| Index Points |
Share Returns |
Share Price ($) |
Share Returns |
Share Price ($) |
Share Returns |
| 1 |
4650 |
|
13.05 |
|
8.00 |
|
| 2 |
4770 |
2.581% |
13.40 |
2.682% |
7.60 |
-5.000% |
| 3 |
4840 |
1.468% |
13.87 |
3.507% |
7.00 |
-7.895% |
| 4 |
4940 |
2.066% |
13.12 |
-5.407% |
7.70 |
10.000% |
| 5 |
4815 |
-2.530% |
13.37 |
1.905% |
8.10 |
5.195% |
| 6 |
4788 |
-0.561% |
13.00 |
-2.767% |
8.60 |
6.173% |
| 7 |
5055 |
5.576% |
13.50 |
3.846% |
8.30 |
-3.488% |
| 8 |
5125 |
1.385% |
13.90 |
2.963% |
8.90 |
7.229% |
| 9 |
5035 |
-1.756% |
14.12 |
1.583% |
9.70 |
8.989% |
| 10 |
5115 |
1.589% |
14.87 |
5.312% |
10.20 |
5.155% |
| 11 |
5200 |
1.662% |
15.25 |
2.555% |
10.65 |
4.412% |
| 12 |
5255 |
1.058% |
16.05 |
5.246% |
11.05 |
3.756% |
| 13 |
5305 |
0.951% |
16.40 |
2.181% |
11.45 |
3.620% |
| 14 |
5408 |
1.942% |
16.00 |
-2.439% |
10.95 |
-4.367% |
| 15 |
5510 |
1.886% |
16.25 |
1.563% |
10.55 |
-3.653% |
| 16 |
5430 |
-1.452% |
16.50 |
1.538% |
11.00 |
4.265% |
| 17 |
5360 |
-1.289% |
17.00 |
3.030% |
10.55 |
-4.091% |
| 18 |
5420 |
1.119% |
17.35 |
2.059% |
10.10 |
-4.265% |
| 19 |
5490 |
1.292% |
18.00 |
3.746% |
10.70 |
5.941% |
| 20 |
5555 |
1.184% |
18.35 |
1.944% |
9.45 |
-11.682% |
| 21 |
5500 |
-0.990% |
18.55 |
1.090% |
10.12 |
7.090% |
| 22 |
5575 |
1.364% |
19.20 |
3.504% |
10.45 |
3.261% |
| 23 |
5645 |
1.256% |
18.70 |
-2.604% |
10.05 |
-3.828% |
| 24 |
5695 |
0.886% |
18.20 |
-2.674% |
10.85 |
7.960% |
| 25 |
5770 |
1.317% |
18.75 |
3.022% |
11.15 |
2.765% |
| Beta Coefficient of Financial Ltd |
0.153 |
|
|
|
| Beta Coefficient of Construction Ltd |
-1.239 |
|
|
|
7.
| Financial Ltd |
| Dividend |
Change in Dividend |
Growth Rate |
| 1.00 |
|
|
| 1.03 |
0.03 |
3.00% |
| 1.07 |
0.04 |
3.88% |
| 1.11 |
0.04 |
3.74% |
| 1.15 |
0.04 |
3.60% |
| Average Growth |
3.56% |
| Construction Ltd |
| Dividend |
Change in Dividend |
Growth Rate |
| 0.60 |
|
|
| 0.62 |
0.02 |
3.33% |
| 0.66 |
0.04 |
6.45% |
| 0.70 |
0.04 |
6.06% |
| 0.74 |
0.04 |
5.71% |
| Average Growth |
5.39% |
Market Return = 11.00%
Every investor would like to have minimum rate of return equal to atleast market rate of return. Therefore, in the absence of specific information, it is presumed that investors' required rate of return is equal to the market rate of return which is 11%.
Current price of share = Current Dividend (1 + Growth Rate) / (Required rate of return - Growth rate)
Current price of share of Financial Ltd. = 1.15 (1 + 3.56%) / (11% - 3.56%)
= $16.00
Current price of share of Construction Ltd. = 0.74 (1 + 5.39%) / (11% - 5.39%)
