Question 4 You are an experienced investor in the securities market and you have established an investment portfolio of two blue chips five years ago: Diamond shares with current market value of $235,000 and Platinum shares with current market value of $355,000. Required: a)If your portfolio has provided you with returns of 10.5%, 12.6%, - 11.5%, 14.5% and 15.2% over the past five years, respectively. Calculate geometric average return of the portfolio for this period. b)Assume that data in the table below is available for your portfolio performance, calculate the expected return, variance and standard deviation of the portfolio? Diamond Platinum Expected return 16.5% 23.5% Standard Deviation of return 7% 11% Correlation of coefficient (p) 0.45 c)Assume that beta of the Diamond shares in your portfolio is 1.5. The market portfolio expected return is 13.5%, the risk-free rate of return is 7.2%. Calculate expected return of this stock using Capital Asset Pricing Model (CAPM) d)Assume that you bought 2000 of Platinum shares in your portfolio for a price of $95 each, the dividend paid for this stock is $3/stock each year. Calculate the total return of this investment after five years?
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
HI5002 FINANCE FOR BUSINESS
Question 4
You are an experienced investor in the securities market and you have established an investment portfolio of two blue chips five years ago: Diamond shares with current market value of $235,000 and Platinum shares with current market value of $355,000.
Required:
- a)If your portfolio has provided you with returns of 10.5%, 12.6%, - 11.5%, 14.5% and 15.2% over the past five years, respectively. Calculate geometric average return of the portfolio for this period. b)Assume that data in the table below is available for your portfolio performance, calculate the expected return, variance and standard deviation of the portfolio?
|
|
Diamond |
Platinum |
|
Expected return |
16.5% |
23.5% |
|
Standard Deviation of return |
7% |
11% |
|
Correlation of coefficient (p) |
0.45 |
- c)Assume that beta of the Diamond shares in your portfolio is 1.5. The market portfolio expected return is 13.5%, the risk-free
rate of return is 7.2%. Calculate expected return of this stock usingCapital Asset Pricing Model (CAPM)
- d)Assume that you bought 2000 of Platinum shares in your portfolio for a price of $95 each, the dividend paid for this stock is $3/stock each year. Calculate the total
return of this investment after five years?
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