Question

In: Accounting

You have reviewed the characteristics and historical prices of two companies (A and B), and have...

You have reviewed the characteristics and historical prices of two companies (A and B), and have estimated their relations to the wider market, detailed below:

Company A

Company B

Current dividends per share (just paid)

$0.06

$0.40

Current Beta

1.3

1.5

Growth in dividends

4%

5%

Date

Share Price A

Share Price B

2016

$0.35

$4.13

2017

$0.42

$6.76

2018

$0.40

$5.23

2019

$0.52

$4.88

      

Other information:

  • Current risk-free rate of return: 3% p.a.
  • Current return on market portfolio: 11% p.a.
  1. Calculate the expected return and standard deviation for share A and B.

  1. Calculate the required return for share A and B, given their risk characteristics.   

  1. Calculate the intrinsic value of Company A’s and B’s shares. Based on your calculated intrinsic value, identify whether you would buy or sell the shares, using the 2019 share price for each share as a reference value. Provide justification for your decision.   

d. Briefly explain, in your own words, what is likely to occur, in relation to the risk exposure of an investment portfolio, as an investor increases the number of investments in the investment portfolio

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