Download Fin-40002x Financial Markets Coursework re

Fin-40002x
Financial Markets
Coursework re-assignment
Questions are equally-weighted.
The Assignment must be your own work: it is not a Group Work activity. The penalties for plagiarism
and collusion are severe and may result in you being awarded a zero mark for the Assignment or the
module.
Answers must be presented clearly and marks will be awarded for presentation. You must show all
calculations and necessary working out. Answers not showing supporting calculations will be
awarded zero.
Answer ALL questions:
1. A financial analyst is examining prospects for company JKL which produces mobile
homes. JKL has just issued a dividend of £0.08 per share and the analyst expects this
dividend to grow by 6% this year, by 3% for the next two years, after which dividends
will remain unchanged.
a. If the analyst applies a discount rate of 8%, calculate the value of the
company.
b. Suppose instead that the analysis took the view that dividends would
continue to grow at 1% pa after Year 3. What price would she recommend
for the company’s shares?
c. Interpret your results from part a) and part b).
2. The following table shows risk estimates for the monthly returns on Starbucks stock,
the Fidelity Magellan mutual fund, and the S&P 500 index:
Asset
SD(R)
Starbucks
Fidelity Magellan
S&P500
0.140
0.044
0.041
Beta (relative to
S&P500)
1.75
1.00
1.00
For Starbucks and Fidelity Magellan, what portion of total risk is market risk and
what portion is unique risk? Interpret your result.
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3. You are currently invested in Fund F. It has an expected return of 14% with a
volatility of 20%. The risk-free rate is 3.8%. Your broker suggests you add Stock B to
your portfolio with a positive weight. Stock B has an expected return of 20%, a
volatility of 60% and a correlation of 0 with Fund F.
a. Is your broker right?
b. You follow your broker’s advice and make a substantial investment in Stock B
so that now 60% is in Fund F and 40% is in Stock B. You tell your finance
professor about your investment and he says you made a mistake and should
reduce your investment in Stock B. Is your finance professor right?
c. You decide to follow your finance professor’s advice and reduce your
exposure to Stock B. Now Stock B represents only 15% of your risky portfolio
with the rest invested in Fund F. Is the correct amount to hold of Stock B?
4. The following information is provided for a stock market in which asset returns
respond to two factors:
Asset
A
B
rf
bj1
1.2
0.8
0
bj2
0.4
1.6
0
Rj
16%
26%
6%
a) If the APT holds in this market, calculate the risk premia (price of risk) corresponding
to the two factors
b) Construct a portfolio which gives unit weight to the first factor and zero
weight to the second factor. Hence provide an interpretation for the risk
premia in the APT.
c) Asset C also traded in this market and yields an average return of 12% with
bC1 = 1.0 and bC2 = 0.5. What can you infer about the asset market from this
information?
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