Case Study (Holding period Return, CAPM, Basic Concept)

Suppose you are acting as a financial adviser for a client. The client wishes to build a portfolio of shares and has sought your service. The client wishes to invest in the following companies' shares, and you have the following information (sourced from https://au.finance.yahoo.com/) about these shares:

Company Closing Price: Closing Price: Dividend Payments

2 Jul 2018 28 Feb 2020 between 2 Jul 2018 and 28 Feb 2020

Westpac Banking Corporation (WBC.AX) $29.18 $23.64 12 Nov 2019: $0.80

16 May 2019: $0.94

13 Nov 2018: $0.94

Commonwealth Bank of Australia (CBA.AX) $72.70 $81.78 19 Feb 2020: $2.00

14 Aug 2019: $2.31

13 Feb 2019: $2.00

15 Aug 2018: $2.31

National Australia Bank Limited (NAB.AX) $27.41 $25.10 14 Nov 2019: $0.83

14 May 2019: $0.83

08 Nov 2018: $0.99

The client will purchase 500 shares of WBC.AX, 1,000 shares of CBA.AX, and 800 shares of NAB.AX at respective closing prices of 28 Feb 2020.

Then answer the following.

(a) Suppose an investor bought some shares of each of these companies on 2 Jul 2018 for the respective closing prices. The investor then sold these shares on 28 Feb 2020 for the respective closing prices. The investor also received any dividends paid between these dates for each of the companies. What is the holding period return for each of these companies considering the stated purchase and sale prices and dividends?

( for each of the companies, please note the closing share prices given in the above table. Please also note the total dividends paid between the specified dates. Then, considering the holding period (HPR) formula, determine the holding period returns for each company's shares. Notably, the HPR formula can be used for one unit of asset, i.e., 1 share )

(b) Assume that the holding period returns for these companies' shares, as determined in (a), are also the expected returns of these shares (i.e., assets) for the foreseeable future. With such an assumption, determine the expected return of your client's portfolio.

(please use the expected return of portfolio formula and assume the results derived in (a) as the expected returns for these companies' shares. Please then determine the expected return for the client's portfolio. Notably, the money the client will invest for each company is indicated by the number of shares, and the price at which the client will purchase)

(c) Suppose the risk-free rate of return is 2.50%, and the expected rate of return from the market is 17%. For the expected return of the portfolio determined in (b), determine the beta of the portfolio.

(please note the CAPM and relevant concepts from Week 5 slides. Consider what information you have determined in (b). Please also note what information is given. )

(d) You may have noted that your client wishes to invest in companies all belonging to the same industry (i.e., banking and financial institutions). Do you think such type of diversification with all investments in the same industry is a good idea to reduce risks? Why or why not? Explain.

( this is a discussion question, not a math question. Please note Fig. 1.4 that shows factors affecting share prices. Please also consider concepts like systematic and unsystematic risks, diversification, correlation between assets' returns. Please think and then respond. The recommended maximum words limit is two hundred fifty. You are also encouraged to refer to relevant research and examples for justifying your answer.)