Question 1 - Financial Securities

For this research and analysis assessment, you are required to select three pairs of securities from the options provided in document 'Financial Securities Information' available in appendix.

Each pair represents two individual companies in the same industry who are viewed as competitors. For each selected security, establish an initial "theoretical" investment of $10,000. Your starting portfolio value is then $60,000.

Note: due to varying share prices you will probably not be able to purchase exactly $10,000 of each share but should purchase the number of shares resulting in the closest amount to $10,000.

You are required to monitor the 6 securities you have chosen over the 3 month period (past date can be used).

Section A

a)Record in a table the weekly share price for each of the 6 selected securities for a period of 3 months (approximately 13 weeks). Make sure you record the share price on the same day each week and from the same source. The share price can be obtained from many sources such as newspapers eg. The Financial Review and websites eg. tradingroom.com.au. (to aid the following tasks this is best completed using Excel or similar software). Also record the All Ordinaries index for each week.

b)Using the data collected in (a) above produce a separate line chart for each of the 6 selected securities and the All Ordinaries index.(7 graphs in total)

c)Using the data collected in (a) above produce separate line charts for each of the 3 pairs of selected securities. This will highlight any similarities or differences. When preparing this comparative graph you should ensure that the scale is appropriate to use for a comparison (i.e. if one security is trading around $1 and the other is around $50, then the scales must be adjusted in order to demonstrate a comparison- one way of doing this in excel is to have a second vertical axis).

Section B

Prepare a table showing:

a)The number of shares purchased, at what price and their initial value to the portfolio at the commencement of your 3 month period for each of the 6 securities.

b)The closing share price and the closing portfolio value at the end of your 3 month period for each security.

c)If any of the securities have had a dividend declared during the 3 month period, the dividend should also be recorded (details of the dividend should be noted under the table).

d)The total dollar gain/loss of each security for the 3 months (including dividends).

e)Percentage gain/loss. Dollar gain/loss divided by initial value expressed as a percentage.

f)Portfolio totals for the Initial Portfolio Value, Closing Portfolio Value, Dollar Gain/Loss and %Gain/Loss.

Template for the table 'Securities Analysis' has been provided 'Financial Securities Information' available in appendix.

Also advice which of your selected securities have outperformed your average portfolio return?

Section C

The beta for individual securities and the market as a whole will be constantly moving in reaction to both market conditions and the performance of individual securities. For this section you should use the beta scores listed above for the securities and the industry sectors and use 1.05 for the all-ordinaries index. The details of BETA analysis has been provided in the table 'Securities Comparison' provided in 'Financial Securities Information' document available in appendix.

For each selected pair of securities, compare the Beta for each security and for the relevant market sector. From this comparison:

a)Which security in each pair is expected to have the better future return if the market conditions are positive (i.e. a bull market)? Briefly explain your reason(s).

b)How would you expect the security in each pair to perform in poor market conditions (i.e. a bear market)? Briefly explain your reason(s).

c)If the market conditions are positive, would you expect the security to have a better return than the average return for the relevant sector? Briefly explain your reason(s).

d)If the market conditions are positive, would you expect the security to have a better return than the average return for the All Ordinaries Index? Briefly explain your reason(s).

e)Using your calculated return on each security from Part B, has each security performed up to expectations, based on the Beta coefficient, in comparison to its competitor within the pairs selected? Briefly explain your answers.

f)If the risk free rate of return is 6% p.a., what is the market risk premium (or discount when there is a bear market) for each of your selected securities based on the return over the three month research period? (Hint: risk free rate 1.5% for the 3 months)

Section D

a)If you are not risk averse, identify at least one risk taking strategy that may help maximise your portfolio's return in the future.

b)Identify at least one risk minimisation strategy that may improve the possibility that the portfolio's return will not be significantly different from the expected market return. How may this affect the portfolio's return in the future?

Section E

Can you identify the company's dividend policy? Have they adopted a stable dividend, a constant dividend payout ratio, a residual dividend or some other dividend policy? Support your opinion with reference to the company's historical earnings and dividend payments. Dividend policy may not be easily recognisable and may change from time to time. Look for trends to support your conclusions.

Most companies have a shareholders section on their web site. Historical earnings and dividend details may be included here. Alternatively, you can review the historical financial information for each company on investor research web sites (e.g. COMMSEC, Yahoo Finance and Bloombergs are examples of investor research web sites - but there are many others that you may prefer to use.). These details should provide sufficient trends for you to identify the company's dividend policy.

Section F

a)Outline your reasons for selecting the 3 pairs of securities that you chose and the reason for not selecting the other 3 pairs of securities during you initial selection.

b)For each of the securities selected, identify whether you would retain or sell (either partly or in whole) the security at the end of the research period. Give your reasons for your decision.

c)If you choose to sell any particular security, what would you do with the proceeds from that sale and why? (Your discussion with your trainer should consider whether you would buy more of current securities in your portfolio? Would you replace the security with a new security? Would you use the same sector for new securities or a new sector?

Melbourne VIC-300 T: 030-9077-075 Financial-Securities-Information+ Security Options, Security Industry Security A Security B Pair Classification Option Name ASX Name ASX Code Code 1. Banking ANZ Banking Grp Ltd ANZ Westpac Banking Corp WBC 2 Transportation Lindsay Australia LAU Toll Holdings Ltd TOL 3. Pharmaceuticals, Vita Life Sciences Limited VSC Sigma Pharmaceuticals SIP Biotechnology & Limited Life Sciences 4. Telecommunication Engin Ltd ENG Iinet IIN Services Insurance OBE Insurance Group OBE Suncorp Group Ltd SUN 6 Energy Coal & Allied Industries CNA Woodside Petroleum WPL Limited LimitedSecurities Analysis+ Security No. of Purchase Initial Closing Closing Dividends Dollar Gain/Loss Shares Share Portfoli Share Portfolio Declared Gain/Loss (based on Price o Value Price Value (including initial (Date) (Date) Dividends) investment) Security 1 Security 2 Security 3 Security 4 Security 5 Security 6 TOTALT: 030-9077-0 Securities Comparison+ Company BETA Company BETA Industry BETA A B Classification ANZ 0.85 WBC 0.76 Banking 0.89 LAU 0.99 TOL 0.74 Transportation 1.01 VSC 0.77 SIP 0.76 Pharmaceuticals, 0.54 Biotechnology & Life Sciences ENG 0.50 IIN 0.50 Telecommunications Services 0.48 QBE 0.50 SUN 0.76 Insurance 0.90 CNA 1.11 WPL 1.12 Energy 1.14