coursework

Task 2

 

In Task 1 you chose five UK stock market-quoted companies and obtained risk information for each, based on sample share price data from November 2016 to November 2019. For Task 2, you will assess the returns on your five shares over the two-year period from November 2019 to November 2021. In addition, you will analyse the differences between the actual returns on the shares over the two-years with expected return measures based on application of the Capital Asset Pricing Model.

 

2a. Set up the investment

 

Imagine it is the end of November 2019. You invest £20,000 in each of your five companies – a total investment of £100,000. 

 

  • Assume the price paid for shares is the price at the end of November 2019.
  • Calculate the number of shares bought in each company. Note that you can only buy whole shares, meaning your investment in each company is very unlikely to be exactly £20000. Round the investment to a number of shares that produces an outlay nearest to £20,000 (the deviation will be small, probably no more than a few pence or pounds for each company)

(5 marks)

 

2b. Measure the actual annual return for each of your five investments for the year November 2019-Novemer 2020

 

Actual returns is made up of two components:

 

  1. The change in the share price over the year
  2. Dividends received from the company during the year

 

Calculate the actual return on each of your £20,000 investments in both financial and percentage terms. Measurements should incorporate the share price change and dividend income components.

 

  • For dividends, irrespective of how many dividend payments were received from a company during the year, or when they were received, sum the payments and assume a single cash dividend received at the end of November 2020
  • You will need to search for your companies’ dividend payments. The information is readily available on company corporate websites, on stockbroker sites (such as Hargreaves Lansdown) or via general web searches.
  • If a company did not pay dividends, ensure this is noted in the submission

 (5 marks)

 

2c. Measure actual annual return for each of your five investment for the year November 2020-November 2021

 

Begin by reinvesting any dividend income from the first year in additional shares of the  company that paid the dividend (Again, bear in mind that it is highly unlikely that the dividend received from a company equates to an exact whole number of shares. Adjust the calculation to the nearest whole number of shares). Show:

 

  • How many extra shares are bought in each company in November 2020
  • The total number of shares held in each company, and the market value of each share holding, at the end of November 2020

 

Based on these opening values for the year, measure the financial and percentage return on each investment for the year to November 2021. As you did in the first year, incorporate dividends received in the year to November 2021 into measures of returns.

(7 marks)

 

 

2d. Measure the actual return on each investment for the two-year term (November 2019-November 2021) viewed as a single holding period

 

This can be done very easily. Take the total value of each shareholding at the end of November 2021 (part 2c) and compare it to the opening investment in each asset. 

(3 marks)

 

2e. Measure the aggregate value of your five investments at the end of November 2021 and the weighting of each company shareholding in the total value

 

Undertake a short discussion on how the overall value of the five assets has changed over the two year and the degree to which the importance of each asset in the total value changed. 

(5 marks)

 

2f. Calculate an expected return for each investment based on the Capital Asset Pricing Model and analyse the differences between expected and actual returns.

 

In applying the CAPM to generate expected annual returns for each of the five assets:

  • Use the beta values from Task 1 as estimates of the exposure of each investment to market risk
  • Choose annual risk-free returns appropriate for the period November 2019-November 2021. This will necessitate some investigation into returns on assets considered risk-free during the period (government bond yields, bank savings rates). The rationale for your chosen risk-free return should be noted. You might or might not consider it necessary to use a different risk-free return for each year of the two years.
  • Use actual annual returns on the FTSE All-Share Index to represent market portfolio returns. This will be made up of the percentage change in the market index (based on the index data collected for Task 1) for each year plus the annual dividend yield for the FTSE All-share Index (Recall, you have included dividends in the actual returns for your five shares. Therefore, comparison of actual with market-determined expected returns must incorporate the effect of dividend payments on market returns)

 

An simple online search will yield a workable measures of the FTSE All Share dividend yield for 2020 and 2021. 

Analyse the differences between the actual returns (those in tasks 2b, 2c and 2d) and the CAPM-based expected annual returns for each asset. These difference are known as ‘excess’ or ‘abnormal’ returns. Comparisons should be made for:

 

  • The year November 2019-November 2020 (2b)
  • The year November 2020-November 2021 (2c)
  • The two-year period November 2019-November 2021 (2d)

 

Highlight and discuss any aspects of the abnormal performance profile for your five assets that you feel are especially noteworthy. 

(15 marks)

 

Undertaking the Task 2 Report 

 

For task 2 there will be a single Turnitin submission dropbox. The report should be organized in sections corresponding to 2a, 2b, 2c, 2d 2e and 2f above.

 

2a. Outline the number of shares bought for each of the five companies, the total size of the investment in each and the total investment overall. 

(5 marks)

 

2b. Ensure a clear presentation of the extent to which the values of your five investments have changed in financial and percentage terms. Did your £20,000 stake in each company grow or fall in value during the first year? To what degree? 

(5 marks)

 

2c. Whilst similar to 2b, there is a twist in the instruction to reinvest dividends in the respective companies. Ensure that this feature of the exercise is clearly explained with the results given due prominence.

(7 marks)

 

2d. This should be presented in a concise form, bringing together for brief comment the value of each shareholding after two years with the opening value.

(3 marks)

2e. Ensure emphasis is given to how the value of your five-asset investment has changed together with how the weightings of the assets within the total have shifted. 

(5 marks)

 

2e. This is the least prescriptive, most analytical, component of Task 2. It tests the depth of your appreciation and understanding of what your results suggest about the status of the claim that asset return is a function of systematic risk alone. 

(15 marks)

 

(Maximum mark Task 2: 40)

 

The guidelines for each element are precise. Study them carefully. 

 

Task 2 accounts for 40 marks out of a total of 100 for the coursework.

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