Question 2.3 (10 Marks)

Company A BETA Company B BETA Industry Classification BETA

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. Biotechnology & Life Science 0.54

TPM 0.50 TLS 0.50 Telecommunication 0.48

QBE 0.50 SUN 0.76 Insurance 0.90

RIO 1.11 WPL 1.12 Energy 1.14

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.

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). (2 marks)

(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) .(2 marks)

(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). (1.5 marks)

(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). (1.5 marks)

(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. (1.5 marks)

(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) (1.5 marks)

Question 2.4 (2 Marks)

(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?

Question 2.5 (3 Marks)

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 shareholder's 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.

Any 2 industry

Portfolio of InvestmentConstant Dividend: Under the constant dividend policy, a company pays a percentage of its earnings as dividends

Stable dividend: The exact amount of dividends that are paid out depends on the long-term earnings of the company.

Residual Dividend: A residual dividend is a dividend policy that companies use when calculating the dividends to be paid to shareholders

Question 2.6 (10 Marks)

You are required to present this section in class as scheduled by your trainer. You must use visual aid (power point slides) to make the presentation.

To answer the following questions, you are required to conduct a research to support your answers. Please provide any graphs, charts, table of statistics if clarify your findings.

(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 your initial selection. (3 marks)

(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. (3 marks)

(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?) (2 marks)

d) Outline the key ethical, legislative and organisational considerations for risk management options for a company based on your findings from the beginning. (2 Marks)