Answer ALL questions (10 marks for each question).

1.

a.Briefly discuss fundamental analysis through own words and the basic assumptions behind it.(4 marks)

b.Company A & Company X are in the same industry and the following table shows some key ratios.

A

X

Industry Average

Current ratio

1.20

0.89

1.10

Debt/Equity

0.20

0.40

0.30

Total asset turnover

1.90

2.10

2.50

Net profit margin

4.20%

3.80%

4.00%

Return on equity

12.40%

14.80%

15.00%

Dividend payout ratio

25.00%

10.00%

20.00%

Discuss the relative natures of the two companies in terms ofrisk and return.Identify the growth-oriented company and justify your choice.You should support your discussions and conclusions with the given financial ratios.(6 marks)

2.Jeffrey is currently holding a $2 mil portfolio as follows :

Value

% of Total

Expected Annual Return

Annual Standard Deviation

Short-term bonds

0.2 mil

10

4.6%

1.6%

Large-Cap Equities

0.6 mil

30

12.4%

19.5%

Small-Cap Equities

1.2 mil

60

16.0%

29.9%

Total

2.0 mil

100

13.8%

23.1%

Moreover, he is so lucky that he will have another $2.0 mil so that he is going to invest the additional amount in an index fund.Suppose you are Jeffrey's financial planner and you are evaluating 4 index funds for him to form a portfolio which should meet 2 criteria relative to his current portfolio:

i)Maintain or enhance the expected return, and,

ii)ii)Maintain or reduce the volatility.

Here are the details of these 4 index funds :

Index Fund

Expected Annual Return

Expected Annual Standard Deviation

Correlation of returns to current portfolio

A

15%

25%

0.80

B

11%

22%

0.60

C

16%

25%

0.90

D

14%

22%

0.65

Discuss your suggestion to Jeffrey.You should justify your choice and describe how the chosen fund can best meet the two criteria.(5 marks for calculation; 5 marks for discussion and comment)