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In Assessment 1, you have used Yahoo7!Finance to determine holding period returns for BHP Billiton Ltd and Commonwealth Bank of Australia. In this assessment, you will gain further experience of using the resource.
Assume that you are acting as financial advisor for a firm. You have a client who wants to develop a share portfolio through investingin shares of BHP Billiton Ltd (symbol: BHP.AX), Commonwealth Bank of Australia (symbol: CBA.AX), and Myer Holdings Ltd (symbol: MYR.AX). The client has $10,000 to invest and is seeking your advice regarding the following investment choices.

Investment Choice    Percentage of $10000 invested in BHP.AX    Percentage of $10000 invested in CBA.AX    Percentage of $10000 invested in MYR.AX
A    30%    35%    35%
B    50%    25%    25%
C    35%    25%    40%

Assume that expected return for all three companies’ shares are the same as holding period returnsfor these sharesover the period 1 Jan 2015 – 30 Jun 2015 (the holding period returns are to be calculated based upon closing prices at these two dates and dividends attained between these two dates).

(a)    Given these information and presuming expected return of the portfolio as your only selection criteria, which of the aboveinvestment choices will you advise the client to adopt?
                                        [7 marks]
(b)    Suppose, you are also given the following (hypothetical) information:
Share    β
BHP.AX    0.97
CBA.AX    0.80
MYR.AX    2.00

Also, assume that your client is risk-averse. Will your advice regarding the investment choices change due to the above-indicated information for β? Why or why not?[7 marks]

(c)    If your client build up a portfolio through investing in many different companies’ shares, will the client be able to completely eliminate risk for investing?Explain.        [6marks]
[NOTE:For this question, you need to refer to at-least three references. One of the references is the textbook; and the others can be any web based reference/textbook/journals/articles or other resources. The idea of this question is to encourage you to do a bit of research on relevant topics.]

Q2. Bond Valuation- General
Suppose Mr. M is considering investments into the bond market. He considers two bonds:

Bond A:
This bond has a face value of $100, and coupon of 8% paid annually. The bond matures in 10 years.

Bond B:
This is a zero-coupon bond, which also has a face value of $100 and matures in 10 years.Interest is compounded annually.

Given the above information:
(a)    Determine the price of the bonds, if Mr. M’s required rate of return is 8% p.a. for both bonds.                                     [2 x 2 = 4 marks]
(b)    Assume Mr. M’s required rate of return is also the market rate of interest on similar bonds. Given this assumption, which of these bonds sells for a discount and which sells at par value?                                         [2 marks]
(c)    Suppose, Mr. M buys the zero coupon bond (Bond B C) now, which matures in 10 years, for $85. After a year, he sells the bond for $95.  Determine the bond’s yield to maturity (YTM) at the time when Mr. M buys it and at the time when he sells it.            [4 marks]

 



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