ASSESSMENT QUESTIONS: Please answer all questions. Each question carries 20 marks.
- In April 2020, a market view on the FTSE100 index from an analyst was given as below:
Probability Scenario FTSE100 Return
0.5 Bull 40%
0.3 Neutral 10%
0.2 Bear -30%
Update this market view and discuss your market view on the FTSE100 for the period from April 2021 to March 2022. Make clear what your subjective probability for each of the possible market scenarios is and their corresponding returns for the index. Although it is your subjective market view, you need to defend it by using most recent macro-economic news, references and/or historical data analysis. Historical data are available from either Bloomberg or internet sources (for example, https://finance.yahoo.com/quote/%5EFTSE%3FP%3DFTSE/history?period1=1428969600&period2=1586822400&interval=1d&filter=history&frequency=1d).
Based on your market view, calculate the expected rate of return for the FTSE100 index and its standard deviation for the period of April 2021 and March 2022.
- Choose a company listed in the FTSE100, which is provided in the appendix of this report. Discuss whether this chosen share has a defensive, neutral or aggressive beta. You have to back up the beta of your chosen share by either references, or by performing regression analysis using historical price data for this chosen company and the FTSE 100 index. Historical price data for individual shares in the FTSE100 index can be collected from either Bloomberg or internet sources (for example https://finance.yahoo.com/). Based on your own updated market view for the FTSE100 index from question 1 and beta for your chosen share, calculate the expected rate of return for this share based on the Capital Asset Pricing Model (CAPM). The risk-free rate of return is assumed to be 0.1% per year.
- In order to construct an optimal portfolio which maximizes a client’s utility score, which risky asset, either a FTSE100 index tracking portfolio or your individually chosen share from question 2, should be used to mix with a risk free asset?
Using your client’s degree of risk aversion A = 2, a utility score function U(μ,σ)= μ-1/2 Aσ^2 and a risk-free rate of 0.1% per year, calculate the optimal weight allocation into the risk free asset for this client. Your discussion should be supported by relevant portfolio theories.
- Conduct a fundamental analysis of the chosen company in question 2. The analysis must employ both P/E and Dividend Discount Model (DDM) valuation approaches.
a) You are required to demonstrate your forecasting process, backed up by relevant data sources and references, on (1) the earnings per share for your chosen company at the end of March 2022, (2) the price of this chosen share at the end of March 2022 using a reasonable P/E multiple.
b) You are required to demonstrate the forecasting process by showing your prediction, backed up by relevant data sources and references, on (1) the growth rate for your chosen company for the coming 5 years from April 2021 to March 2026, and (2) the price of this chosen share at the end of March 2022 by using the DDM valuation approach.
Based on your analysis, summarize your recommendation to your potential investment clients.
- Discuss the links between financial markets and economic development and explain why a company’s share price today, in an efficient financial market, can provide information on economic performance for the coming year. Your discussions should be based on the efficient market hypothesis and empirical evidence in the literature.