You are starting an internship at a large investment fund called “WhiteRock”. Your manager
has tasked you to write a report for a client that compares the potential return and risk
profiles of different investment opportunities. Given the uncertainty with current financial
markets, this client is considering investing only for the medium term (approximately 5 years).
The investment fund is thinking whether a well-diversified or limited diversification strategy
would be preferable for this client. You expect that extra returns could be generated as
compensation for bearing more risk.
1. Select two stocks and an appropriate market index from the Australian Securities
Exchange (ASX), London Stock Exchange (LSE) or New York Stock Exchange (NYSE). The
two stocks will form the limited diversification portfolio and the market index will be the
diversified portfolio. Justify why these two stocks are appropriate choices to combine
together and your choice of a relevant market index.
2. Estimate and compare the returns and standard deviation of each stock and the market
index over an appropriate time period. Justify your data choices.
3. Calculate the beta of each of the two stocks. Justify your data choices.
4. Calculate the expected return of each stock using the Capital Asset Pricing Model (CAPM).
Justify your data choices.
5. Construct a series of limited diversification portfolios with the two chosen stocks by
varying the weights of each at 2.5% increments – starting at 100% invested in Stock X and
then increasing the weight of Stock Y until it reaches 100%. Calculate the expected return
and beta of each portfolio. The results should be presented on an appropriate graph.
6. Provide a final recommendation to this client on the most appropriate choice(s) that they
should invest in and how it could be implemented most optimally.
Justifications should be made with reference to appropriate academic literature.
FINC2011 Corporate Finance I Semester 2, 2019
1. Conforming with instructions (e.g. word length, font, other instructions)
2. Presentation, communication & style (written)
3. Clarity of expression (incl. accuracy, spelling, grammar, punctuation)
5. Use of literature/knowledge of theory
6. Data/information gathering/processing
9. Problem solving
Formatting and Presentation:
1. The report should be no more than 12 pages with 1.5 line spacing and size 12 Arial or
Calibri Font. Please number the pages of your report. Marks will be reduced by 10% for
each page you exceed the page limit. Hence, your mark will be reduced to zero if the
report exceeds 22 pages. You will be penalised for inappropriate formatting.
2. Ensure you use proper academic referencing in supporting the ideas and discussion within
your report. All reports must include a list of references in academic form using the APA
method. The APA referencing style can be found here:
https://libguides.library.usyd.edu.au/c.php?g=508212&p=3476096. You will be penalised
if you use inappropriate referencing.
3. Pay particular attention to presentation. A component of your mark will be based on
presentation. Avoid overdoing formatting and ensure that the report is very clear, logical
and professional. Pay attention to grammar. Clear and logical presentation is a major
challenge in report preparation.
4. Preparing a concise report poses a major challenge. Brevity and conciseness are key
ingredients of a highly successful report. Every part of the report should somehow add to
the end result; otherwise, it is superfluous and distracting.
5. The report must be submitted as a .pdf document. Excel spreadsheets must be submitted
as a .xlsx workbook. You must submit two files electronically via the link on Canvas.
The page limit for the report is 12 pages.
What is included in the 12 page limit?
What is excluded from the 12 page limit?
Table of contents
Appendices (Appendices must include a sample of the data used. Please paste this a
“picture” in the Appendix. Appendices should be used sparingly and only used to provide
information to the reader, where appropriate)
FINC2011 Corporate Finance I Semester 2, 2019
Stocks and market index selection /4 marks
Returns and standard deviation /4 marks
Stock betas /5 marks
Expected returns /4 marks
Portfolios construction /3 marks
Final recommendation /7 marks
Presentation and style of report /3 marks
Inappropriate use of literature up to -5 marks
Incorrect referencing up to -5 marks
Failure to comply with formatting requirements up to -5 marks
Each page over the 12 page limit -3 marks per page
TOTAL MARKS /30 marks