Risk and Return

 

Introduction

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. Students are required to use the data provided in the case problem and exhibits to make various calculations with the view of producing a 700 word report.

 

Assignment Components

The exhibit contains monthly returns for Financial Ltd, Construction Ltd and the Stock Market index.

Also note that students have to complete this assignment in teams three. Assignments submitted by individuals will NOT be accepted. This assignment requires each group to undertake independent research. No further assistance will be provided to student groups in completing the assignment.

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:

 

  1. 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.
  2. Mean (expected) return and standard deviation for the stock market and the two companies.
  3. The coefficient of variation for the market and the two companies.
  4. The correlation coefficient between Financial and Construction Ltd.
  5. The standard deviation of returns for a portfolio consisting of Financial Ltd and Construction Ltd (assume equal weightings).
  6. Beta coefficient calculation for both Financial and Construction Ltd
  7. 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.

 

REPORT

Your team is also required to produce an approximately 700 word report that comments of the results calculated above. The report will need to refer to each statistic calculated and interpret the result and make comparisons amongst the market index and the two companies. Your team is required to specifically address what each statistic is actually measuring and its implications from a risk and return viewpoint. You will also need to focus on the impact of creating a portfolio of two shares and the implications for risk reduction (You will need to provide some quantitative evidence of risk reduction). Furthermore, the Beta of each company needs to assessed and interpreted in the context of asset pricing. Finally, calculate the present value of each share by determining the required rate of return (CAPM) and then utilizing the dividend growth model.

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