Investment Analysis and Portfolio Management

Learning Outcomes:

1. Critically appraise the basis of risk/return characteristics of bonds and ability to calculate and interpret measures of risk and return.

2. Critically evaluate the characteristics, inherent risks and behaviour of equities and bonds.

3. Critically assess the main valuation models applied to equity and fixed income securities and be able to interpret them with real world data.

Learning Outcomes:

1. Critically appraise the basis of risk/return characteristics of bonds and ability to calculate and interpret measures of risk and return.

2. Critically evaluate the characteristics, inherent risks and behaviour of equities and bonds.

3. Critically assess the main valuation models applied to equity and fixed income securities and be able to interpret them with real world data.

1.Download and examine the series of daily stock prices and returns of any two companies listed under different industries on the London stock exchange for the period of one year before Brexit referendum (23 June 2016) and one year after. Stock returns should be downloaded directly from Thomson Reuter’s datastream or computed from the downloaded stock prices using the formula, where  is natural log,  is the current price and  is the original price.

Your examination should be about pre and post Brexit referendum computing the following, including economic explanation of the parameters/answers for investors’ use.

i. HPR and HPY

ii. Annual HPR and HPY

iii. Geometric mean of the annual HPR and the HPY

iv. Risk of the stock returns using variance and standard deviation measures

v. Coefficient of variation (CV) of the stock returns. Use geometric mean to calculate your expected returns.

2.Using the same data in Question 1 above, estimate and briefly explain the slope of the security market line (SML) using capital asset pricing model (CAPM) of the two stocks pre and post Brexit referendum. Use both real and nominal risk free rate in the UK in your computation (you may use Fisher effect formula in the computation).                                                                               

3.Identify and briefly explain the fundamental risks (unsystematic risks) of the two companies selected above.    

4.Compute the current price (share value) of the two companies selected above for pre and post Brexit referendum date using constant-growth dividend discount model (DDM). You may use capital asset pricing model to estimate your cost of equity and 4 years (n=4) prior final annual dividend declared by the companies to estimate the constant growth. You are allowed to make reasonable assumptions. Explain any limitations with your computations.

5. Write brief notes on the following, supporting your points with an existing literature:

i. Main features of a bond and reasons why its maturity is important.   

ii. Risk associated with investing in the United Kingdom bonds.

iii. The relationship between coupon rate, required yield and price of a bond.

iv. Comparison between debentures, unsecured loans and convertible bonds in the United Kingdom bond market with real examples of at least two of each.