Solve the following question.

Answer ALL questions (10 marks for each question). a. Briefly discuss fundamental analysis in your own words and the basic assumptions behind it.( 4 mark) b. Company A & Company X are in the same industry and the following table shows some key ratios. A X Industry Average Current ratio 1.20 0.89 1.10 Debt/Equity 0.20 0.40 0.30 Total asset turnover 1.90 2.10 2.50 Net profit margin 1.20% 3.80% 4.00% Return on equity 12.40% 14.80% 15.00% Dividend payout ratio 25.00% 10.00% 20.00% Discuss the relative natures of the two companies in terms of risk and return. Identify the growth-oriented company and justify your choice. You should support your discussions and conclusions with the given financial ratios. ( 6 marks) 2. Jeffrey is currently holding a $2 mil portfolio as follows : Value % of Total Expected Annual Standard Annual Return Deviation Short-term 0.2 mil 10 4.6% 1.6% bonds Large-Cap 0.6 mil 30 12.4% 19.5% Equities Small-Cap 1.2 mil 60 16.0% 29.9% Equities Total 2.0 mil 100 13.8% 23.1% Moreover, he is so lucky that he will have another $2.0 mil so that he is going to invest the additional amount in an index fund. Suppose you are Jeffrey's financial planner and you are evaluating 4 index funds for him to form a portfolio which should meet 2 criteria relative to his current portfolio: i) Maintain or enhance the expected return, and, ii) Maintain or reduce the volatility. Here are the details of these 4 index funds : Index Expected Annual Expected Annual Correlation of returns to current Fund Return Standard Deviation portfolio A 15% 25% 0.80 B 11% 22% 0.60 C 16% 25% 0.90 D 14% 22% 0.65 Discuss your suggestion to Jeffrey. You should justify your choice and describe how the chosen fund can best meet the two criteria. (5 marks for calculation; 5 marks for discussion and comment)