Total Word Count 3,500 words. Does not include numbers, equations, or items included in tables. Part 1 1a. Consider a fictional company ABC plc, which paid the following dividends per share in the...

STATISTICS ASSIGNMENTS
Ans 1 a (ii)
Gordon Growth Model is tool that is called as Dividend discount model or constant growth model is a very famous stock valuation method which is used for valuing the Share’s intrinsic or fundamental value. In the real or actual world things are not as simple as they are assumed to be with this model .There are certain assumption of the Gordon Growth model:
Company’s business model is stable;
Company’s is assumed to grow at a constant, unaltered rate;
Every company has stable financial leverage;
Company’s free cash flow is usually paid as dividend.
Fundamental value -= D1/( Ke – g)
Weakness of the Gordon Growth Model:
Biggest weakness or limitation of the Gordon growth model is that it’s assumption that the company’s earning is assumed to grow at a fixed constant rate year on year which is serious concern. In actual world it is highly unlikely or impossible that the company’s dividend or earning will increment or grow at constant rate. We all know that the business operation are subject to business cycles or unexpected financial stresses or successes. There could be a chance that dividend may growth or even decline for some years or even attain zero rate.
Gordon growth model is highly sensitive to the growth rate and discount factor assumed. This implies that it’s always assumed that the discount factor will always > Growth rate of dividend per share. This is so because if the growth rate is in excess of discount factor then the result will be negative value and making the model useless or worthless.
Besides if the Discount factor achieved by the Gordon growth model is equal to the growth rate achieved which will make value per share reaching the infinity.
It seeks to ignore the companies which does not distribute the dividends since the formula only assumes the dividend growth rates and discount factor.
This model takes into the consideration the prevalent qualitative factors which might influence the result of the model like Industry trends, Management strategy, Fresh infusion of funds or introduction of new technology etc. Sometime in spite of being highly cash generating company, management team may have curtailed the future dividend pay-outs and replaced it with retaining cash to fund a likely future investment or expansion opportunity .Hence the company’s strategy may be to hold back the dividend pay-out and retain the cash for future business growth opportunities which will maximize the shareholder’s earning and returns.
Thus model will not be useful for the industries where there is rapid growth in earnings and less predictable dividend patterns. Such industries as Telecom, software, new age start up or venture capitalist enterprises which defy the new laws of gravity with their performances YoY it’s very difficult to fathom how this model will deliver the reliable returns. Since the Gordon growth model is constant growth model till perpetuity without taking into consideration the seasonal ups and downs due to various other factors. In fact such model may be useful in more mature industries or stock market indices which demonstrate a stable and expected dividend growth trends.
Another weakness of applying the Gordon growth model is that it explicitly fails to consider the risk as important component in a
iving at the stock valuation.
Another weakness of this model is that model must be used in collaboration with the other models to accurately valuing the companies which are experiencing the abnormally high growth rates.
Another major weakness of the model is glaringly obvious which is that it doesn’t factor the external market condition prevailing like the size of business, market perception about the company and products, consumer behaviour , price elasticity of demand which
and enjoys etc.
Model also does not deliver accurate result for companies which have i
egular or uneven flow of cash flows, dividend distributions patterns or leverage. All these factors play an important role in determining the co
ect stock valuation.
Ans 1 b (ii) Macaulay duration and modified duration –A Difference
    Macaulay duration                        Modified duration
a) Computes weighted average time investor     Establishes % change in bond value @
    must hold bond till PV of Bond’s cash     X% interest rate change.
    flows equals amount of cash outflows
    Macaulay duration                        Modified duration
) Computed by multiplying time period by     Value of Macaulay duration divided by 1,
Periodic Coupon payment and dividing     + YTM, divided by period of coupon pa.
Result by 1 plus Periodic yield to time of
Maturity.            
c) Measure in the units of time (i.e. years)    Measured in the terms of yields %.
d) Less frequently used in applications         More widely applied and used.
e) Requires Cash flow to be stable and fixed     No such requirement here.                                                
Ans 1 c (i)
A futures contract is an agreement between 2 willing and consenting parties where both clients assent to buy and sell a particular assets of certain specific quantity and at a pre evaluated price, at a specified date in the future. While the buyers of the future contract undertake an obligations to buy and receive the underlying assets when such future contract expires. While Seller of such contract assumes obligations to provide and deliver underlying assets at expiration date. These are prefe
ed by speculators or a
itrageurs.
The future contracts are refe
ed to as derivative instrument as it is covered by an underlying assets which is being traded on the markets or contracted like (shares, cu
ency, interest rates, Bonds, Oil, etc.). These futures contracts can be used for hedging, spreads, speculation or a
itrage.
Basically there are 5 main steps in any marketing mechanism or procedures of trading in futures contracts basis the outlook, determining the risk tolerance /position sizing , evaluating the initial margin requirement and finally offsetting to close the open positions.
Firstly no matter what kind of underlying assets that client is trading on, it’s very critical to have vision or outlook about the behaviour of nature of assets. If the price of assets is expected to increase in near future, one would like to bet long on such future contract in a speculation or if the price is likely to drop, client will bet short futures on it. It’s all related to rational behaviour of a human being that controlling loss is human tendency and multiplying wealth maximisation opportunities is psychology. When you say long or short, one is refe
ing to time period (i.e. days, months or years). Hence before engaging in any Future contract it’s important to know the time when the Future contract will expire so position can be squared or closed.
Secondly is the most important aspect of Risk Tolerance and position sizing. Every investor has different risk profile and appetite according to their pocket. Future contract is leveraged form of trading mechanism in which the losses can accumulate in hu
y and just wash away the account faster than one can even imagine. Therefore one needs to be vigilant or cautious as this form of trading method is intolerant of losses, since the profit or losses are closed at the end of every day in method called “Daily Settlement”.
Usually majority of traders have 1% or 2% risk tolerance .We all buy or sell future contract with sole aim of boosting our profit but we rarely prepare ourselves for facing the losses in the deal. Hence it’s critical to project how much loss is tolerable from the deal if trade didn’t go as planned. Once this is known can one determine the position sizing of the trade? This is tool for determining how many quantities of Future contracts tom actually trade in so that when the price of the underlying assets does not swing in client’s favour total loss on transaction is still within risk tolerance limit.
Thirdly is evaluating the initial margin requirement of such contract. Post determining the optimal no. of Future contracts to buy or sell client has to decide whether he will like to trade in aggressive short term trade, recommended course of action for such client is to go short by choosing short term contract period. While if he goes for less risky, stable and relatively less volatile client will choose long term expiration.
Initial margin is the life and blood of Future contract i
espective of choosing long or short trade trick. If the cash flow is limited it is advisable to trade in limited future contract, since trading with all the wealth is insane as there will be no money left to meet maintenance margin if trade swings against our terms or favour.
Next step is that following age old adage in the Future parlance which is that “Always go long when anticipating or speculating on the...