Question

1. Your client is impressed with a publicly listed Australian company and has provided you with the following information for you to provide advice. Your client indicates that the company is closely integrated with the Australian economy and that the rates of return for the Australian economy as a whole can be used in the evaluation process. You have researched the following returns and other characteristics for this company: • Australian Treasury bills currently pay a return of 1.5% p.a. • Australian stock market return over the same period has averaged 7% p.a. • Australian stock market standard deviation of returns is 8.5% p.a. • This company’s beta is estimated at 0.85. • Historical returns and dividends (below).

Year Price Dividend 2015 $1.40 2016 $1.54 $0.00 2017 $1.41 $0.05 2018 $1.59 $0.00 2019 $1.63 $0.07

Using the above information, identify with full mathematical workings, whether it is a good idea, for your client, to invest in this company. Explain your reasoning for your decision. Only provide mathematical workings. No Excel.

Answer 1

S.No.	Year	Price	Dividend	Change in Price	Total Return	Deviation Actual Return - Average Return	Deviation ^ 2
A	B	C	D	E	F = D + E	G = F - AVERAGE	H = G^2
1	2015	1.4	0		0	-0.07	0.0049
2	2016	1.54	0	0.14	0.14	0.07	0.0049
3	2017	1.41	0.05	-0.13	-0.08	-0.15	0.0225
4	2018	1.59	0	0.18	0.18	0.11	0.0121
5	2019	1.63	0.07	0.04	0.11	0.04	0.0016
	TOTAL				0.35	0.00	0.05
	AVERAGE				0.07

= 0.96 %

Conclusion : This stock not worth to invest due to low return.