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End assessment Submission guidance You must ensure that you have: This is a single assessment, covering ground from most of the topics in the course. Each of you has been allocated a company to study on the spreadsheet provided (my company highlighted). Data on recent monthly stock prices for that company as well as prices for the FTSE-100, which are given in the spreadsheet provided. Using these data and through your own research on the company (and its industry peer group) complete the tasks below. Note that you will need to extract information from a financial data source to complete some of the tasks. To answer some parts of the question, you will also need to do some research beyond the boundaries of the lecture notes and the recommended reading. If required in any part of the questions below, assume that the risk-free rate is 0.1% per month and that the market portfolio is the FTSE-100 (so that if you need the expected return on the market portfolio set it equal to the mean return on the FTSE-100 computed from the data that you have been given). Give a description of the industry that your company operates in and its competitive position within that industry. Also, detail the manner in which your company has chosen to finance itself (i.e. through debt and equity and other funding sources) and describe how its financial structure compares to its key industry peers. [Write no more than 1.5 pages] 10 marks Compute and present the mean monthly return on your stock and on the FTSE-100 and the monthly return standard deviations. Discuss the relative magnitudes of mean returns, standard deviations and compute and comment on monthly Sharpe ratios for the stock and the market. Also, compute the correlation between stock and market returns and discuss its implications. [Write no more than 1 page, not counting space taken up with plots and tables] 5 marks [Write no more than 4 pages in total for this question] Client A wants a portfolio of the stock and the market such that for every pound invested in the stock, there is a pound invested in the market. Client B wants a portfolio where for every pound invested in the stock, there is 25 pence invested in the market. Work out the mean return and the return volatility on each portfolio and give an intuitive justification for thier differences. 10 marks Show how you would build a portfolio of your stick and the risk-free asset that had a monthly return volatility of exactly 8%. Interpret the result you obtain. 5 marks Consider the statistics you computed previously for the FTSE-100. You want to build a portfolio that combines the FTSE-100 with a new stock, X. X has a mean monthly return of 1.5% and monthly standard deviation of 8%. Its return correlation with the market is 0.05. Build the portfolio frontier that one can obtain from investing in combinations of the FTSE-100 and X and briefly discuss the features of the frontier. [To build the frontier, start with a portfolio that is wholly invested in the FTSE-100 and compute its mean return and return standard deviation. Then increase the weight on X by 0.25 and reduce that on the FTSE-100 by the same amount and re-compute the mean and variance. Continue this process until the portfolio is wholly invested in X.] 10 marks Using the frontier that you computed in (c), identify the portfolio that one would select if one wanted to maximise the Sharpe ratio. Explain intuitively why this portfolio can be used to create a position that dominates either investing only in the market or only in X. 10 marks [Write no more than 2 pages in total for this question] Compute and present the beta of your stock’s equity to the FTSE-100. Explain how you have estimated it. 4 marks Discuss what your estimated beta implies for the market risk that this stock carries and the relationship between returns on the FTSE-100 and returns on the stock. Discuss the magnitude of your stock’s estimated beta relative to the beta on the risk-free asset and the market portfolio, respectively. Compute the required return on your stock via the CAPM. 8 marks How would you build a portfolio of your stock and the market which had a beta of 10.75? Show all of the steps in your computations. 7 marks Provide a multiples-based analysis of the value of the equity in your allocated company, using two or three companies operating in the same (or a very similar) industry as comparators. Use price to forecast earnings as the comparison variable. What does your analysis suggest about the valuation of the company’s equity? What are the limitations of your analysis? [Write no more than 2 pages] 20 marks [Data note: the spreadsheet contains adjusted share prices, which account for the payment of dividends by reinvesting those dividends into the stock. In completing the questions above, compute returns as percentage changes in the adjusted prices.]

End assessment Submission guidance You must ensure that you have: This is a single assessment, covering ground from most of the topics in the course. Each of you has been allocated a company to study on the spreadsheet provided (my company highlighted). Data on recent monthly stock prices for that company as well as prices for the FTSE-100, which are given in the spreadsheet provided. Using these data and through your own research on the company (and its industry peer group) complete the tasks below. Note that you will need to extract information from a financial data source to complete some of the tasks. To answer some parts of the question, you will also need to do some research beyond the boundaries of the lecture notes and the recommended reading. If required in any part of the questions below, assume that the risk-free rate is 0.1% per month and that the market portfolio is the FTSE-100 (so that if you need the expected return on the market portfolio set it equal to the mean return on the FTSE-100 computed from the data that you have been given). Give a description of the industry that your company operates in and its competitive position within that industry. Also, detail the manner in which your company has chosen to finance itself (i.e. through debt and equity and other funding sources) and describe how its financial structure compares to its key industry peers. [Write no more than 1.5 pages] 10 marks Compute and present the mean monthly return on your stock and on the FTSE-100 and the monthly return standard deviations. Discuss the relative magnitudes of mean returns, standard deviations and compute and comment on monthly Sharpe ratios for the stock and the market. Also, compute the correlation between stock and market returns and discuss its implications. [Write no more than 1 page, not counting space taken up with plots and tables] 5 marks [Write no more than 4 pages in total for this question] Client A wants a portfolio of the stock and the market such that for every pound invested in the stock, there is a pound invested in the market. Client B wants a portfolio where for every pound invested in the stock, there is 25 pence invested in the market. Work out the mean return and the return volatility on each portfolio and give an intuitive justification for thier differences. 10 marks Show how you would build a portfolio of your stick and the risk-free asset that had a monthly return volatility of exactly 8%. Interpret the result you obtain. 5 marks Consider the statistics you computed previously for the FTSE-100. You want to build a portfolio that combines the FTSE-100 with a new stock, X. X has a mean monthly return of 1.5% and monthly standard deviation of 8%. Its return correlation with the market is 0.05. Build the portfolio frontier that one can obtain from investing in combinations of the FTSE-100 and X and briefly discuss the features of the frontier. [To build the frontier, start with a portfolio that is wholly invested in the FTSE-100 and compute its mean return and return standard deviation. Then increase the weight on X by 0.25 and reduce that on the FTSE-100 by the same amount and re-compute the mean and variance. Continue this process until the portfolio is wholly invested in X.] 10 marks Using the frontier that you computed in (c), identify the portfolio that one would select if one wanted to maximise the Sharpe ratio. Explain intuitively why this portfolio can be used to create a position that dominates either investing only in the market or only in X. 10 marks [Write no more than 2 pages in total for this question] Compute and present the beta of your stock’s equity to the FTSE-100. Explain how you have estimated it. 4 marks Discuss what your estimated beta implies for the market risk that this stock carries and the relationship between returns on the FTSE-100 and returns on the stock. Discuss the magnitude of your stock’s estimated beta relative to the beta on the risk-free asset and the market portfolio, respectively. Compute the required return on your stock via the CAPM. 8 marks How would you build a portfolio of your stock and the market which had a beta of 10.75? Show all of the steps in your computations. 7 marks Provide a multiples-based analysis of the value of the equity in your allocated company, using two or three companies operating in the same (or a very similar) industry as comparators. Use price to forecast earnings as the comparison variable. What does your analysis suggest about the valuation of the company’s equity? What are the limitations of your analysis? [Write no more than 2 pages] 20 marks [Data note: the spreadsheet contains adjusted share prices, which account for the payment of dividends by reinvesting those dividends into the stock. In completing the questions above, compute returns as percentage changes in the adjusted prices.]

Answered Same DayFeb 22, 2021

The pharmaceutical industry is one of the leading industries of UK that contributed around £34 billion to the UK economy as on June 2015. Around 73,000 people are employed in this Industry in around 545 companies. World’s top 20 firms have presence in the UK itself. Pharma Industry spent a significant amount of £3.9 billion on research and development as on 2007. In 2017, the total revenue generated by the Industry is £42 billion that has growth rate of 5% over previous year’s revenue and expected to grow with the same pace. Glaxo Smithkline, Pfizer, Novartis, AstraZeneca, Hoffmann-La Rocha are some of the

Glaxo Smithkline (GSK) is UK based multinational pharmaceutical company that was established in 2005 and as on 2015; it is world’s seventh largest pharma company. Its shares are listed on London Stock Exchange and also a constituent of FTSE 100. With the market capitalization of $81 billion, it is fourth largest company on stock exchange. Some of the key financial statistics of GSK is on Dec 2019 are as follows –

Market Cap

103.17 Billion

Enterprise value

103.81 Billion

PE ratio

41.81

Profit margin

13.76%

Return on Assets

7.44%

Return on Equity

47.83%

Revenue growth

8.66%

Debt/Equity

166.19

Beta of stock

0.34

Dividend yield

2.52%

Payout ratio

86.01%

Source: http://finance.yahoo.com/GSK

Long term debt and Common equity are two major source of financing of GSK. As on Dec 2012, the long term debt to equity ratio is 4.36 that are quite high. Pfizer, Merck and Amgen are the major competitors and their sources of finances are also long term debt and equity. However, the Debt to equity ratio of Pfize, Merck and Amgen as on Dec 2019 are 0.52, 0.74 and 2.79 respectively. Therefore, in comparison to competitors the Debt equity ratio of GSK is highest and thus, high risk of solvency.

Answer 2

The mean monthly return on GSK and FTSE 100 are 0.6613% 0.6657% respectively. The Standard deviation of monthly returns on GSK and FTSE 100 are 0.0468 and 0.0365 respectively. Therefore, the monthly return on market is higher than GSK while the average risk on market is lower than GSK.

Sharpe ratio is defined as the excess return on the portfolio or stock over the total risk. It is a performance measure over some benchmark. Thus, Sharpe ratio is mathematically defined as

Sharpe ratio = (Rp – Rf) / σ

Where, Rp is the average return on portfolio

Rf is the risk free rate of return and

σ is the total risk of portfolio.

The Sharpe ratio of GSK and FTSE 100 over the time are given in the following graph –

The graph shows that Sharpe ratio of FTSE 100 fluctuates more than GSK. In most of the time, the FTSE 100 performs better than GSK.

The correlation coefficient provides very important information regarding the degree of mutual association of any two stocks. It shows how the return on one stock is varied with the return on other stock. If Correlation coefficient is 1 or -1, both the stocks are perfectly correlated and if it is zero, both the stocks are completely uncorrelated. Therefore, the correlation coefficient lies between -1 and 1.

The correlation coefficient between GSK and FTSE 100 is -0.15. The figure is negative and low. It shows that for 1% increase in the return on FTSE 100, the return on GSK falls by 0.15% and vice versa. Thus, GSK can better be used to diversify the portfolio’s risk if such portfolio is constructed including both FTSE 100 and GSK. In the time of recession when the market may give negative return, GSK may prove to be a better investment avenue that will give positive yield to investors. Thus, GSK stock may acts as a cushion in adverse situation.

Answer 3

Portfolio is basket of different securities that provides an average return over moderate risk. Since it is a basket of securities of different asset class, the loss if occur on single or few assets, it is compensated by gain one other assets. Therefore, risk of huge loss is generally not occurred selection and an average return with moderate risk is generated. However, it is also very crucial to form an efficient portfolio where the one can gain the maximum return over minimum risk.

The risk and return on the portfolio is defined as -

Return on the portfolio = W1R1 +W2R2

Risk of the portfolio = Sqrt[(W1*σ1)2 + (W2*σ2)2 + 2*W1*W2*ρ* σ1* σ2]

Where, W1 and W2 are weight of the securities 1 and 2 in the portfolio

R1 and R2 are the returns on the securities R1 and R2 respectively

σ1 and σ2 are the risk of securities 1 and 2 respectively.

ρ is the correlation coefficient between returns on securities 1 and 2.

Now, For Client A

Client A wants a portfolio of the stock and the market such that for every pound invested in the stock, there is a pound invested in the market.

Therefore, the proportion of stock and market in the portfolio is1:1. It means portfolio is equally weighted. So weight of stock and market in portfolio would be 0.50 and 0.50.

Therefore the average monthly return on portfolio = 0.5*0.006613 + 0.5*0.006557

= 0.006585 i.e. 0.6585%

The risk of the portfolio = Sqrt [(0.5*0.0468)2 + (0.5*0.0365)2 + 2*0.5*0.5* (-0.15)*0.0468*0.0365]

= Sqrt [0.000547 + 0.000333 – 0.000128]

= Sqrt [0.000752] = 0.0274

Therefore, the risk and return on the portfolio would be 0.0274 and 0.6585% respectively.

For client B

Client B wants a portfolio where for every pound invested in the stock, there is 25 pence invested in the market. Therefore, the proportion of stock and market in the portfolio is4:1. It means the weight of stock and market in portfolio would be 0.80 and 0.20.

Therefore the average monthly return on portfolio = 0.8*0.006613 + 0.2*0.006557

= 0.006602 i.e. 0.6602%

The risk of the portfolio = Sqrt [(0.8*0.0468)2 + (0.2*0.0365)2 + 2*0.8*0.2* (-0.15)*0.0468*0.0365]

= Sqrt [0.001402 + 0.000053 – 0.000082]

= Sqrt [0.001373] = 0.0370

Therefore, the risk and return on the portfolio would be 0.0370 and 0.6602% respectively.

Portfolio for client A is more preferred than portfolio of client B. It is due to the reason...

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