Question 3(show all workings 60 marks)

This question relates to material covered in Topics 1-5. This question addresses the 1st, 2nd and 3rd subject learning outcomes.

(a)Bradley hates taking risk with his money; "I hate shares and property, I know a lot of people who have lost money in those investments".As a result he will only consider bank guaranteed investments.Bank guaranteed investments are returning 1%.Bradley has a marginal tax rate of 32.5% and pays medicare levy of 2%.

1. Assuming he pays tax at 32.5% plus medicare levy, on the income from his investment, is he preserving the real dollar value of his investment if inflation is 2.5% per annum?Show your workings to justify your answer.(2.5 marks)
2. When considering your calculations, how would you explain the benefits of risk to Bradley?(2.5 marks)

(b)Explain the Australian dividend imputation credit system and how it applies in Australia. Include an analysis of how the receipt of franking credits will result in differing returns for Australian resident and international investors.(10 marks)

(c) Below is the monthly share price data for A2 Milk Company for the 2018 financial year (source:https://au.finance.yahoo.com/quote/A2M.AX/). Note: no dividends were declared for the 2017-18 FY.

Date Open Close

Jul 17

3.79

4.14

Aug 17

4.15

5.04

Sep 17

5.10

5.86

Oct 17

5.92

7.62

Nov 17

7.34

7.59

Dec 17

7.60

7.37

Jan 18

7.40

8.29

Feb 18

8.32

12.23

Mar 18

12.21

11.46

Apr 18

10.96

11.31

May 18

11.36

9.93

Jun 18

9.70

10.52

1. Calculate the 2017-2018 monthly holding period returns (in both $ and %) for A2M.(4marks)
2. Calculate the average monthly return (%) for A2M.(1.5 marks)
3. Using the data provided calculate the annual holding period return (in both $ and % terms) for an international (non-Australian) shareholder of A2M.(1 mark)

(d)The monthly datafor the Australian All Ordinaries share price index (Source:https://au.finance.yahoo.com/is below.c

Date

Open

Close

Jul 17

5,764.00

5,773.90

Aug 17

5,773.90

5,776.30

Sep 17

5,776.30

5,744.90

Oct 17

5,744.90

5,976.40

Nov 17

5,976.40

6,057.20

Dec 17

6,057.20

6,167.30

Jan 18

6,167.30

6,146.50

Feb 18

6,146.50

6,117.30

Mar 18

6,117.30

5,868.90

Apr 18

5,868.90

6,071.60

May 18

6,071.60

6,123.50

Jun 18

6,123.50

6,289.70

1. Calculate the monthly holding period returns (%) for the Australian share market (MKT) during 2017-2018 FY.(4 marks)
2. Calculate the average monthly holding period return (%) for the MKT (ALL ORDS).(1.5 marks)
3. Calculate the annual holding period return (in % terms) for the Australian share market (MKT) (as proxied by the All Ords index) during 2017-2018 FY.(3 marks)
4. Using Excel (XL) prepare a line graph comparing the monthly returns for A2M and the return on the Australian (MKT).(5 marks)
5. Calculate the risk for 2018 as measured by standard deviation of both A2M and the MKT.(4 marks)
6. According to Reuters Finance A2M Ltd has a Beta of 1.04. In terms of share investment, define what Beta represents. What does A2M's Beta of 1.04 mean? How risky is it?(5 marks)
7. The average return on the market (MKT) in Australia for the past 10 years has been 9.55% (Source:https://www.asx.com.au). The yield on Australian 10 year treasury bonds is currently 2.29%. Using these as proxies for the Return on Market (MKT) and Risk Free Rate (Rf), combine them with the A2M Beta (above) and calculate the return expected for A2M using the Capital Asset Pricing Model (CAPM).(4 marks)
8. Using the CAPM data from the previous question create an XL scatter plot graph to plot the Security Market Line (SML) using the Risk Free Rate, Return on Market, and A2M asdata points.(5 marks)
9. Recreate the graph from (viii) above but this time also include the actual 2018 returns for A2M and the MKT as previously found (using the same beta measures).(3 marks)
10. Based on your CAPM findings construct a portfolio made up of 40% A2M and 60% MKT. Calculate the estimated return and for this portfolio.(4 marks)