Alex Plc is a newly-established company with interests in retailing and property development. Its current market capitalisation is £75m. The company trades exclusively in the UK, but it is planning to expand overseas either by acquisition or joint venture within the next two years. The company has built up a portfolio of investments in equities and corporate and government debt. The main aim of developing this investment portfolio is to provide a source of funds for its overseas expansion programme. Summary information on the portfolio is given below. Approximately 60% of the UK equities are in small companies’ shares, and details of the portfolio are as follows. The average return on all UK equities, over the past 12 months, has been 12%. On US equities, it has been 12.5%.
You are required to: How do we approximate the risk-free rate in practice? Explain the importance of risk-free assets to portfolio theory. (10marks) 2. Discuss the risks and returns of different types of financial assets used by Alex Plc to conduct the investment portfolio, including UK equities, US equities, corporate bonds and government bonds (long term and short term). (20marks) 3. Empirical study has found mixed evidence on the efficient market hypothesis (EMH) for UK stock market. Explain different forms of EMH and distinguish the implications for listed companies accordingly. (20marks) 4. Alex Plc is going to increase its investment in equities issued by UK Blue-chip companies. Please prepare a report to recommend One UK Blue-chip company with supportive evidence. Your analysis should be based on: Your evaluation of the share price, in which you need to apply TWO different valuation methods: i) P/E (price-to-earnings) multiple method, and ii) Dividend growth model method. (40marks) b) The impact of the new investment on overall risk and return of the portfolio.
