Question 4) - Part A 7-marks

You are a young finance professional who is pursuing his career into the equity market, after a long efforts he got the position in equity firm where initial job description is to pitch clients for long term investments into different sector of Pakistan Stock Market. After meeting two or three clients he decided to use the relative valuation approach in order provide a useful insight to clients and convince them for investments. He gather the data of few firms which are mentioned below in the exhibit 1

	FFBL	EFERT	FFC	ENGRO	AHCL	FATIMA
Current Market Price	21.40	66.49	111.00	303.50	43.50	28.80
EPS	(7.00)	9.50	14.36	16.86	2.09	6.82
Total Equities value (In mn)	2,626	45,111	37,682	86,209	15,486	80,971
No. of shares (In mn)	934	1,335	1,272	576	408	2,100
Expected growth of EPS	5.00%	7.00%	2.00%	3.00%	7.00%	5.00%
Expected growth of BV	2.00%	7.50%	3.50%	4.00%	5.50%	7.00%

Exhibit 1

Now find the intrinsic value based on the relative valuation approach by using the above statistics, however, you will use the 70% weight to PE and 30% weight to PB approach to find the expected intrinsic value, furthermore, hell only invest in company which produces the more than 15% of return.

Instructions:

Write down the brief report of at least 250 words with complete steps of your working.

Question 4) - Part B

Your client is willing to invest in Mutual funds industry to keep its portfolio diversified. Therefore he wants your advice in respect to which fund is better option for his risk level positions. He is risk averse investors and required high liquidity which enables him to meet day to day operations. You have gathered the data from Mutual funds and its allocation which are mentioned below:-

	Fund A	Fund B	Fund C
Cash & Cash Equivalents	30.00%	5.00%	20.00%
Equity	40.00%	70.00%	60.00%
Bonds	30.00%	25.00%	20.00%
Total	100.00%	100.00%	100.00%
Portfolio Return	18.00%	25.00%	20.00%
Benchmark Index Return	15.00%	20.00%	22.00%
Risk Free Rate of Return	7.50%	7.50%	7.50%
Portfolio Risk (Variance)	1.50%	6.00%	4.50%
Tracking error	5%	12%	10%
Covariance with Market	0.1425	0.2567	0.1555
Variance of Market	0.5752	0.1426	0.1825

Use above information to measure the different ratios for mutual funds evaluation.

• Sharpe Ratio
• Jensens Alpha
• Information Ratio

Recommend which fund is best suitable to clients risk and return profile.