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 portfolios return in the future.

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

Question 2.5 (3 Marks)

Can you identify the companys 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 companys 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 companys dividend policy.