Assume that you are providing financial advice to a well-diversified Australian investor, Mr. Rex Sandilands, a full-time biology secondary school teacher and part-time wrestler. Mr. Sandilands is seeking to undertake further investment in any or all of the companies included on the following page, which are each included in the Australian Securities Exchanges ASX 200 Index. To assist your investment decision-making process, you have been provided the following information:

the forecast expected return on the Australian Stock Exchanges ASX 200 Index will be approximately 10% over the next year

on average, the ASX 200 Index has produced returns approximately 4% in excess of risk-free Australian securities

The relevant Australian companies under consideration are:

Foxwedge Mining (beta of 1.2) having an expected rate of return of 11.5%

Sirpinz Holdings (beta of 0.8) having an expected rate of return of 11.5%

Galilee Trading (beta of 2.0) having an expected rate of return of 12.5%

Required:

1. Given the above information, what is the required rate of return for each of the companies discussed above?
2. In practice, beta values are available from public sources, either at no or at a nominal charge. If you did not however have access to these beta values as given in the question, briefly explain how would you determine such beta values for each of these companies?

Hint: What processes would you use to assess a beta value for each company? (Students should write no more than 100 words for this part of the question).

3. Using all of the information included in this question, would you recommend investment in any or all of the companies discussed above by Mr. Sandilands? Briefly justify your discussion using terminology understandable to Mr. Sandilands, given that, although he is a well-diversified investor, Mr. Sandilands has only a very introductory understanding of finance principles and theory. That is, provide Mr. Sandilands with a convincing argument in favour of / rejection of, the individual companies under consideration.

(Students should write no more than 150 words for this part of the question).

4. Regardless of the advice provided in part c) of this question, assume that Mr. Sandilands subsequently invested $360,000 in a portfolio of the relevant companies comprised as follows:

Foxwedge Mining $180,000

Sirpinz Holdings $145,000

Galilee Trading $35,000

Under these circumstances what would be Mr. Sandilands: i) portfolio required rate of return? and ii) portfolio beta?

5. Briefly comment on how you might use the calculations undertaken in part d) of this question to assist Mr. Sandilands in the future given his decision to invest in the portfolio. That is, having performed the calculations in part d) of this question, of what use are they as a decision-making tool?

(Students should write no more than 100 words for this part of the question).

6. What is the relevance in this question to the statement that; Mr. Sandilands is a well-diversified Australian investor? Hint: How does the above statement allow students to progress with the various calculations / discussion included in this question?

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