Introduction The focus of this assignment is on risk, return and equity analysis. The expectation is that students will develop skills in measuring returns, risk assessment and analysis and valuation. Students are required to use the data provided in the case problem and exhibits to answer a series of questions.

Assignment Components

The exhibits contain financial information on Infinite Ltd, Constant Ltd and Variable Ltd. It also contains return information and dividend information for two Stocks: Integrity Ltd, Natural Resources Ltd, and the Share Market Index.

Group Assignment:

You will be required to complete this assignment in teams of three. It is important that you form your teams as soon as possible. We can make announcements prior to the lecture to alert other students without a team to meet after the class.

The assignment requires each team to undertake independent work. We will only provide some initial guidance in lectures to assist teams in commencing the assignment.

Presentation:

Please note that under NO circumstances will we allow assignments to be submitted by individuals (This is a group assignment).

Note that marks will be deducted for poor presentation

The assignment accounts for 15% of the subject's assessment.

Guidelines for the Assignment:

• Excel functions can and should be used to complete the detailed statistical calculations.
• Your answers should be clearly labeled on an answer sheet(s) by reference to the question number, with any further supporting calculations referenced to an appendix.

• The standard of your presentation will be assessed and marked.

• Evidence of your team's breadth and depth of research will be assessed.

• We expect that you will provide explanations as to how you established each answer. All detail relating to your answers needs to be shown within the assignment. This may include explanation of procedures undertaken, assumptions made and the choice of a formula to solve a problem. We require detailed explanations.

• You need to reference. This requires the use of both footnotes and a reference sheet. Marks will be deducted from assignments that fail to reference. (refer to your unit guide for referencing)

• There is an expectation that each team will work collectively rather than independently when completing this assignment. As members of a team you are all jointly responsible for the contents of your assignment.

• Assignment must be submitted through VU collaborate drop box before or on the due date (see above). An extension is granted only for very compelling reason.

Background Information

Your Professor requires your team to develop a written presentation based on information that he has collected for this assignment. The information itself is not complex, but the difficulty of your task is in the analysis and clarity of your explanations of the results.

Each team is required to review the information provided and break it down into its simplest components and figure out a way to show how risk is treated in the financial markets and when making investment decisions. The presentation should be as comprehensive as each team feels is necessary and consistent with the questions asked.

There are two ways to understand risk: risk could be measured in conjunction with an investor's portfolio, or risk could be measured as the potential for variation of returns from a single investment. It is stressed that each team should work out these two different meanings of risk in the presentation and make sense of each. In addition, your Professor is concerned that the techniques used in finance are complicated and tedious, and wants this presentation to discuss and demonstrate how these techniques can actually make sense when considered carefully and in the context of the requirements of this assignment. Therefore, he expects you to use of excel statistical functions to make any calculations. This should ensure that your team does not spend much time with these calculations. The emphasis is on analysis of your results.

The Data

The Professor has provided several sets of numbers for the team to use in the presentation. The first set was a group of returns for three different stocks that these stocks might face in the future and the return each was likely to experience (Exhibit 1). To be conservative, each future scenario was considered to be equally likely. The Professor is convinced that there was some way to measure and compare the risks of these potential investments and suggested that the team target finance fundamentals when coming up with such a measure.

In addition to measures of risk for individual stocks and/or projects, the Professor requires the presentation to deal with how investors measured risk when a portfolio was being considered. The Professor has extracted some representative numbers from the Internet: annualized monthly returns for the market index and two different stocks (Exhibit 2). He indicates to you that the proper measure of risk for a portfolio would have to be calculated using this kind of data series.

Exhibit 1: Probable returns for several different investments.

Exhibit 2: Annualised Monthly Returns for the Market Index and Two Traded Stocks (Integrity Ltd & Natural Resources Ltd).

Exhibit 3

Dividend History: Annual dividends paid for the last 6 years.

Questions

Your Professor has instructed the team to specifically answer all of the following questions:

1. Using the information given in Exhibit 1, determine expected return for each investment for the next period. In addition, find the standard deviation of return for each investment.

2. Using your answer to 1, above, and assuming that investors can only invest in one of the three alternatives in Exhibit 1, use expected return and standard deviation to determine which alternative would be the most appropriate for a risk-averse investor. Justify your method of selection using the numerical data (compare risk to return).

3. Calculate the correlation coefficient between Infinite and Constant, Infinite and Variable and Constant and Variable shares using the probability data in Exhibit 1. What do these results suggest in terms of diversification?

4. Determine the expected return and standard deviation of a two-asset portfolio comprised of Infinite and Constant shares, Infinite and Variable shares, and Constant and Variable shares. Assume equal weightings of each share within each portfolio. Are these portfolios more efficient than holding a single asset? Explain your answer with the use of numerical data.

5. Determine the expected return and standard deviation of a three-asset portfolio comprised of Infinite, Constant and Variable shares. Assume equal weightings of each share within the portfolio. Why is the computation more complex than a portfolio comprising of only two shares? Justify numerically how risk has further reduced from a 2-asset portfolio to a 3-asset portfolio.

6. Use the numbers in Exhibit 2 to determine the average return, variance and standard deviation for Integrity Ltd, Natural Resources Ltd and the Market index.

7. Use the numbers in Exhibit 2 to determine the systematic risk (Beta) of both Integrity and Natural Resources Ltd. Provide an interpretation of your results? What exactly does Beta measure and how does it differ from standard deviation?

8. Use the capital asset pricing model to calculate the required rate of return for both Integrity and Natural Resources Ltd. Assume the risk-free rate of return is 3%. What is the required rate of return and what function does it serve as part of the valuation process?

9. Utilising the required rates of return calculated in question 8 above and the historical dividend information in exhibit 3; calculate the present value for both companies using the dividend valuation model. State any assumptions regarding future dividend patterns that you have made and why you made them.