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FN018A Postgraduate Diploma in Investment Management

Question

Answered

Questions:

Question 1 Assume that you work as a senior equity analyst in a financial services firm. Consider the following probability distribution of returns for two stocks, A and B:

Required:

1. Calculate the expected return and standard deviation of returns for each stock.
 
2. Calculate the covariance between the returns of stocks A and B.
 
3. Calculate the correlation coefficient between the returns of stocks A and B.
 
4. Consider a portfolio, P, composed of 20% of A and 80% of B. For this portfolio, P, calculate its:
 
• Expected return, and
 
• Standard deviation of returns. Show all steps in your workings.
 
Q2 Wesfarmers Limited (WES) is a diversified business operating in supermarkets, department stores, home improvement and office supplies, resources, chemicals, energy & fertilisers and industrials & safety products. WES is headquartered in Western Australia.
 
Find and summarise selected information from the Annual Report of Wesfarmers Limited for the 2017-2018 financial year. Data collected should be based on continuing operations. Table 1 below provides a sample of financial data for the year 2015 for Woolworths. You can follow this format.

Required:

1.  Clearly present summarised and selected information from the Annual Report of Wesfarmers  Limited.
 
2. For the 2017-2018 financial year, calculate the following measures for Wesfarmers Limited:
 
(a) Return on equity
 
(b) Dividend payout ratio
 
(c) Price/Book(P/B) ratio
 
3.  Using the data provided, derive the sustainable growth rate.
 
4.  Given the return on equity estimate of 9.00% for Wesfarmers and your previous calculations, use the DOM (discount dividend model) to estimate the price of a share of Wesfarmers.
Q3 Assume that you work as a senior equity analyst in a financial services firm where your job is to provide advice and wealth creation strategies to private and institutional investors and corporate clients throughout Australia. As such, you investigate several publicly-listed companies in Australia. These companies are:
 
1. Amcor PLC (AMC)
 
2. ANZ Banking Grp Ltd (ANZ)
 
3. BHP Group limited (BHP)
 
Collect monthly share price data for these three companies for the 2017-2018 financial year. Use this data and Excel functions to provide answers to this question. All the calculations should be done using Excel functions or tools (including statistical functions and the matrix operators).

Required:

Use Excel and its relevant functions or tools (including the matrix procedures) to complete the tasks listed below. Use the population statistics in Excel, wherever appropriate (for steps 2 and 3)
 
1. Generate monthly returns for each of the three companies’ shares. Show the returns in decimal format to 4 decimal places in Table 1.
 
2. Use these monthly rates of return to find the mean and standard deviation of returns for each company's shares. Show these statistics in percentage format to two decimal places in Table 2.
 
3. Construct a covariance matrix of the monthly returns on these three shares. Show the content of this matrix in decimal format to
5 decimal places in Table 3.
 
4. Consider a portfolio, V, with weights of 20% on AMC, 30% on ANZ, and 50% on BHP. Calculate this portfolio's monthly mean return and the standard deviation of its returns, showing the statistics in percent. Show this information in Table 2 (the same table as used for #2 above).
 
Your Excel spreadsheet is required and must be submitted with your work in a separate Excel document. In addition, from your Excel work, you also need to copy the results into your Word submission, presenting this work in a suitable manner, such as in a table or tables.
 
The tables must be neatly presented showing the table numbers, titles and source of information. 
 
These tables and the numbers in them must be appropriately formatted —as can be expected in professional presentations.
 
You can use reliable public online databases to collect data. We suggest you use the following 
 
UniSA Library guide which shows you how to approach researching a company
 
Q4 is about a portfolio with three assets. You will use Excel's matrix functions as we have more than two assets; we need computations which are hard to do manually but easy using Excel functions. An additional document is provided under the ‘Assessment’ file. It shows you how to use Excel functions to do matrix algebra and portfolio statistics.
 
Q5 Assume that you recently joined an investment management firm: V Investment Australia Limited. This firm has a broad range of clients, including employee benefit plans, wealthy individuals, and charitable organisations. The firm has expertise in managing stocks, bonds, cash, real estate, venture capital, and international securities.

Part A (800 words):

Your line manager asked you to do some research on the efficient market hypothesis (EMH). Hence, in  this task, you are required to read at least four (4) articles and address the following two
 
(a) Evaluate the empirical evidence and arguments ‘for’ and ‘against’ the efficient market hypothesis (EMH), drawing on your knowledge, independent research, and the theoretical perspectives and evidence presented in the articles you have chosen.
 
(b) Discuss how you will apply the EMH in the provision of investment advice, thinking about the evidence presented in the articles you have chosen.

Part B (400 words):

One of your clients, Mark has built up a large share portfolio outside of superannuation using margin lending. Mark has constantly increased the level of borrowing attached to the portfolio until he reached the maximum level prescribed by the margin lender. He says that this strategy worked well for a number of years, but he has recently been hit with a margin call. Mark has no other assets other than the portfolio and reveals to you that he is concerned about losing much of  the capital in his portfolio.

Mark asks you to explain the pros and cons of margin lending. You are  required to:

(a) Identify two (2) advantages and two (2) disadvantages of gearing.
 
(b) Describe three (3) ways investors can meet margin calls. Discuss which of these strategies Mark  will most likely use.

Note:

1. Doing these research tasks is not only subject to textbook knowledge. Based on the textbook, you are expected to extend your horizon by reading reliable online resources including academic articles. A good resource is the university library reading materials.
 
2. You need to show that you really understand the ideas in your discussion, and ensure your analysis is both logical and has a clear focus. Use your own words rather than simply copying statements from the quoted sources. Marks are not awarded for this type of answer, but an expression of your own thinking, argument and logical discussion is rewarded.
 
3. Use the UniSA preferred Harvard referencing style for any resources you quoted.
 
4. Type the word count at the end of your written answer.

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