Financial Analysis and Investment Strategies

Question 1: Analysis of Probability Distributions for Stocks A and B

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:

1. Calculate the expected return and standard deviation of returns for each stock.

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2. Calculate the covariance between the returns of stocks A and B.

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3. Calculate the correlation coefficient between the returns of stocks A and B.

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4. Consider a portfolio, P, composed of 20% of A and 80% of B. For this portfolio, P, calculate its:

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� Expected return, and

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� Standard deviation of returns. Show all steps in your workings.

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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.

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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.

1. �Clearly present summarised and selected information from the Annual Report of Wesfarmers� Limited.

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2. For the 2017-2018 financial year, calculate the following measures for Wesfarmers Limited:

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(a) Return on equity

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(b) Dividend payout ratio

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(c) Price/Book(P/B) ratio

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3. �Using the data provided, derive the sustainable growth rate.

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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:

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1. Amcor PLC (AMC)

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2. ANZ Banking Grp Ltd (ANZ)

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3. BHP Group limited (BHP)

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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).

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)

Question 2: Financial Analysis of Wesfarmers Limited

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1. Generate monthly returns for each of the three companies� shares. Show the returns in decimal format to 4 decimal places in Table 1.

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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.

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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.

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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).

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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.

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The tables must be neatly presented showing the table numbers, titles and source of information.�

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These tables and the numbers in them must be appropriately formatted �as can be expected in professional presentations.

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You can use reliable public online databases to collect data. We suggest you use the following�

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UniSA Library guide which shows you how to approach researching a company

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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.

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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.

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

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(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.

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(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.

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.

(a) Identify two (2) advantages and two (2) disadvantages of gearing.

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(b) Describe three (3) ways investors can meet margin calls. Discuss which of these strategies Mark �will most likely use.

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.

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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.

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3. Use the UniSA preferred Harvard referencing style for any resources you quoted.

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4. Type the word count at the end of your written answer.

Add additional funds: The simplest way to meet a margin call is to deposit additional funds into the margin account. This will increase the account's equity, which may bring it back up to the minimum margin requirements.

Sell securities: An investor can also meet a margin call by selling securities in their margin account. If the securities have declined in value, the investor may need to sell more securities than originally intended to meet the margin call. This strategy, however, may result in realizing losses if the securities are sold for less than what they were purchased for.

Negotiate with the broker: In some cases, an investor may be able to negotiate with their broker to adjust the terms of the margin loan. This may involve increasing the margin requirements, extending the payment deadline, or agreeing to additional collateral. However, it is important to note that the broker is not obligated to negotiate, and the terms of the margin loan agreement may limit the investor's ability to negotiate.