Assessment 3:Statistical Group Report
The focus of this report is on risk, return and equity valuation. The expectation is that students will develop skills in measuring returns, risk assessment and analysis. Students are required to use the data provided in the case problem and exhibits to answer a series of questions.
The exhibits contain historical share price information for three hypothetical listed companies and historical data for the share market index.
|1000 words (variations in the word limit of 10% are acceptable)||15%|
Session 9(submitted in drop box by Saturday 11.59pm end of week 3)
Purpose and Learning Outcomes
The purpose of this assignment is to:
Demonstrate your ability to work with other team members in measuring returns, risk assessment and analysis. This will be presented in the form of statistical report.
The Learning Outcomes assessed are:
- LO 1:Systematically analyse the financial press and interpret the information in relation to Australian and global financial institutions;
- LO 2:Collaboratively, synthesise the theoretical and practical developments in finance in our dynamic, global context;
- LO 3:Decode and interpret Corporate Finance concepts and make financial decisions based on the financial results ;
- LO 4:Adapt the application of specific techniques of analysis in solving Corporate Finance problems; and
This assessment task requires your team to develop a written presentation based on information that your lecturer has collected for this assignment. The information is considered rather rudimentary, but the difficulty of the task is in the analysis and clarity of your explanations of the results.
Each team of four 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 complex as the team feels is necessary.
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, it is concerned that the techniques used in finance are complicated and tedious, and this presentation allows you to discuss and demonstrate how these techniques can actually make sense when considered carefully. To reduce the amount of calculations, you will be required to use the statistical functions in excel. There is a spreadsheet in the risk and return topic information that will be covered in class to demonstrate these calculations.
You are provided several sets of stock market for the team to use in the presentation (Exhibit 1). The first set is 61 observations of historical monthly share prices for three different stocks and the historical monthly stock market index over the same period. These representative data has been hypothetical constructed . This information is to be used to determine the monthly returns for the market and each stock.
Exhibit 1 - Monthly Values for the Market Index and the Three Traded Shares.
Share Market Index
|Levered Ltd||United Ltd||Omega Ltd|
Your team is also required to produce an approximately 1000 wordreport that comments on the results calculated above. The report will need to refer to each statistic calculated and interpret (not simply summarise your results) the result and where necessary, make comparisons amongst the market index and the three companies. Your team is required to specifically address what each statistic is actually measuring and its implications from arisk and returnviewpoint. 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 providesome quantitativeevidenceof risk reduction). Furthermore, the Beta of each company needs to assessed and interpreted in the context of asset pricing. That is, what is the implication for risk and required return and what impact will this have on the asset’s price?
Your group will need to submit 2 files in the drop box provided in VU collaborative. There should be a word file that answers the specific questions and provides a summary of the results from the spreadsheet. Your instructor will allocate you into groups of four (4). You will need to register your group in VU collaborative under communications and then go to groups.PLEASE NOTE that all group members need to contribute to this assignment in a meaningful way. Your involvement in the assignment extends making some contribution to all the answers but you may lead the group on any specific allocated tasks. You therefore have a responsibility to read and review the assignment before it is submitted. You must ensure that the assignment is appropriately referenced and formatted and further does not breach university guidelines around assignments.
Each team is instructed to specifically address all of the following questions within your report:
- Using the information given in Exhibit 1, calculate the historical returns for each company and the share market index. With the use of the excel functions calculate the average monthly return and standard deviation of returns for each company and the market index. Provide a summary of these results in a table format in your report. Are these results consistent with the risk/return relationship as described in finance theory?
- Using your answers to Question 1, above, and assuming that investors can only invest in one of the three alternative shares in Exhibit 1, use the average return and standard deviation to determine which share would be the most appealing to a risk-averse investor. Provide numerical justification for your selection based on the coefficient of variation. When you answer this question, also address what finance theory assume around investor preferences for risk and return. What are theannual returnprediction intervals for each stock and the market for the next period? What does this measure tells us about the variation of returns for the market and each share?
- Calculate the correlation coefficient between the 3 stocks. Provide a detailed explanation of your answer and the specific implications for diversification. What combination of 2 shares will produce the highest level of diversification and why?
- Determine the standard deviation of a three asset portfolio comprised of all three shares (Zeta, Kappa & Xi); and the standard deviation of 2-asset portfolios consisting of both Levered and United; Levered and Omega; and United and Omega. Assume equal weightings (50%) of each share within the portfolio. Interpret your results and comment and illustrate the impact on risk when combining shares into a portfolio. Use the correlation of variation to determine which portfolio is the most efficient when it comes to risk and return? What has caused this risk reduction in the portfolio and what specific risk has been eliminated in each case?
- Determine the systematic risk (Beta) for the three shares. Interpret your answers. The use of excel functions should be used to calculate Beta (slope function in excel). What are the implications around the impact of an asset's price given the beta of each share. Reference some documented limitations of beta when assessing market risk?
- Calculate the required return and the present value that you would place on each share. Furthermore, assume that Leverage's dividend has grown from $0.23 to $0.26 in the last 5-years and United's dividend has increased from $0.44 to $0.48 over the last 5-years. Omega's dividend has grown from $0.66 to $0.72 in the last 5-years. The last observed 10-year government bond yield was 3%. Justify the market risk premium you have used to calculate the required rate of return (Hint: you should be able to go online and search for market risk premium in Australia). What documented concerns have been raised in regards to dividend valuation models?
- This group assignment requires 4 students in each group.
- It is important that you communicate with your teams as soon as possible. Group formation will be finalised in Session 4. A list containing all groups will be emailed to students prior to session 4.
- Once finalised the grouping arrangement will not be changed unless there are compelling reasons to do so.
- The assignment requires each team to undertake independent work. We have also attached a further reference for the assignment on VU Collaborative. All teams are also expected to conduct collaborative and independent research when completing the assignment.
- Please note that only one assignment should be submitted for the group. Your assignment must include names of each group member, including student IDs.
- No single-authored submission will be accepted.
PLEASE REGISTER YOUR GROUP IN VU COLLABORATIVE. GO TO COMMUNICATIONS AND THEN GROUPS AND SELECT A GROUP NUMBER AND THEN LIST ALL THE GROUP MEMBERS IN ONE OF THE GROUP NUMBERS PROVIDED.
Requirements for the Assignment
- Excel Statistical functions can and should be used to complete statistical calculations.
- Your answers should be clearly addressed within the report, 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. Please note a minimum of 5 relevant references is required.
- 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 (Use Harvard referencing). Assignments that fail to reference will be graded a fail. All reasonable attempts should be made to reference material taken from your readings and research.
- 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.
- Clear presentation of results
- Sound analysis based on calculations
- Risks Identification
To find out about what criteria will be assessed for the Report, please access the following.
Click here to access the detailed Assessment Criteria Rubric
Submit your Group Report here!
One member of the group needs to submit the report via the Dropbox linked below. This dropbox is also accessible via Assessments > Dropbox
Click here to submit your completed Report via the Dropbox