Choose one company from Table 1 below. This company will be your case company for this assessment and Task 1 of the next assessment (Case Study 2).
Table 1: Monthly Data for Case Companies Month Adairs (ADH) Harvey Norman (HVN) Nick Scali (NCK) Super Retail (SUL) Monthly returns Monthly returns Monthly returns Monthly returns Dec-19 Jan-20 -2.62% 3.93% 1.44% -7.31% Feb-20 8.52% -12.29% 1.71% -13.54% Mar-20 -62.81% -20.49% -52.73% -42.91% Apr-20 75.56% -5.76% 37.57% 37.15% May-20 18.35% 17.27% 20.43% 31.81% Source: Returns calculated from historical share prices and dividends from Morningstar DatAnalysis Premium. For completion of the assessment tasks, you will also need the following data (see Table 2 below):
Table 2: Monthly Data for Reference Company and Market Index Month Reference Company All Orders Total Returns Index Monthly Month Closing returns Index Dec-19 71814.00 Jan-20 1.00% 75179.00 Feb-20 5.00% 69106.00 Mar-20 40.00% 54634.00 Apr-20 1.00% 59847.00 May-20 -3.00% 62862.00 Source: Hypothetical reference company data. All Ordinaries Total Returns (Accumulated) Index data from S&P https://au.spindices.com/indices/equity/all-ordinaries. Note: You will NOT submit a spreadsheet, but a written analysis (as Word file) for this assessment. Tasks for Case Study 1 Using the data above, calculate: The historical monthly rates of return for the market index only (monthly rates of return for the companies are given); and The historical average rate of return and standard deviation of returns for: your case company; the reference company; the market index; and a portfolio consisting of a 40% investment in your case company and a 60% investment in the reference company.
Calculate expected returns and portfolio beta as follows: Use CAPM to estimate the expected return as at 29 May 2020 for the shares of:
1) your case company; and
2) the reference company. To do this, use the yield to maturity on that date of a 10-year Australian Government bond as a proxy for the risk-free rate, assume the market risk premium is 6% and use your chosen case company’s beta in July 2020. (Data to be collected from the first link in the Web Links section of the unit site.) Assume that the reference company’s beta is -0.40. Using the data from part b(1), calculate the portfolio expected return and beta, again assuming 40% and 60% weights for your case company and the reference company respectively. Drawing on expectations from theory and incorporating the overall context of your chosen company, discuss the risk and return measures you have calculated.