Report of Friend Life and Aviva plc

CHAPTER 12 S TA TISTICS FOR P ORTFOLIOS Overview 338 12.1 B asic Statistics for Asset Returns: Mean, Standard Deviation, Covariance, and Correlation 338 12.2 Downloaded Data From Commercial Sources Is A djusted for Dividends and Splits 344 12.3 Co v ariance and Correlation: Two Additional St atistics 345 12.4 Po rt f olio Mean and Variance for a Two-Asset Po rt f olio 349 12.5 Using Regressions 352 12.6 Po rt f olio Statistics for Multiple Assets (A dvanced Topic) 358 C onclusion 360 Exercises 360 Appendix 12.1 Downloading Data From Yahoo 370 Appendix 12.2 Why V arp Instead of Var? 374 337 0195301501_337-376_ch12.qxd 11/3/05 12:55 PM Page 337 O VERVIEW In order to understand and work through Chapters 13–16, you will need to know some statistics. If you’re like a lot of finance students, you’ve had a statistics course and forgotten much of what you learned there. This chapter is a refresher—it show you exactly what you need in order to proceed with the succeeding chapters, using Excel to do all the calculations. (Excel is a great sta- tistical toolbox—someday all business-school statistics courses will use it. In the meantime you’re stuck with this chapter.) Finance Concepts Discussed • How to calculate stock returns and adjust them for dividends and stock splits • Return mean, variance, and standard deviation for an asset • Return mean and variance for a portfolio of two assets • Regressions Excel Functions Used •A verage •Var and V arp • Stdev and Stdevp • Covar and Correl • Tr endlines (Excel’s term for regressions) • Slope, Intercept, Rsq 12.1 Basic Statistics for Asset Returns: Mean, Standard Deviation, Covariance, and Correlation In this section you learn to calculate the return on a stock and its statistics: the mean (inter- changeably referred to as the average or expected return), the variance, and the standard deviation . General Motors Stock and Its Returns The following spreadsheet shows data for General Motors (GM) stock during the decade of the 1990s. For each year, we’ve given the closing price of GM stock and the dividend the company paid during the year. 1 W e’ve also calculated the annual returns and their statistics; these calcula- tions are explained after the table: 338 PA RT THREE PORTFOLIO ANALYSIS AND THE CAPITAL ASSET PRICING MODEL 1 The “closing price” is the price of the stock at the end of the day. 0195301501_337-376_ch12.qxd 11/3/05 12:55 PM Page 338 314LON Coursework 1 Structure The following is indicative only. You should develop your own analysis and research based on available information. (1) Conduct comprehensive valuation on Friends Life prior to the acquisition announcement. (2) Evaluate the impact on the share price of Friends Life and Aviva following the above news announcement. Does the movement of share price reflect the insights from Efficient Market Hypothesis (EMH)? (3) You are required to conduct in-depth background research on Friends Life to enhance the analysis of the acquisition event. Such research should demonstrate understandings of: I. Capital Structure & Weighted Average Cost of Capital II. Required Rate of Return for Equity through Application of CAPM III. The Working of the Insurance Sector & the impact of regulation on the Insurance sector (4) Be able to predict the outcome of the acquisition event. The finding should be specific to the price acquired within the defined timeframe as given in coursework brief. (5) If you need to provide data and valuation result, you can include it in the appendix. (6) References and appendixes will not be included in the final word count Indicative Relevant Course Concepts (to be applied) Indicative Research Resources (a lot more electronic resources at your disposal in the library) ? Capital Structure ? Cost of Debt ? Cost of Equity ? WACC ? CAPM ? Interest tax shield ? Stock & Sector Beta ? Efficient Market Hypothesis ? Past, public & private information ? Standard & Poor’s ? Moody ? Bloomberg (G.06) – need an account to use the terminal ? Sector Beta from NYU – Professor Damodaran http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/wacc.htm ? Bloomberg (G.06) – need an account to use the terminal ? National website of government departments or public information gateway on insurance sector regulation ? Financial Times (FT) ? Bloomberg ? Morningstar ? Yahoo Finance (UK) 314LON COURSEWORK 1 The following news was announced on November 21 2014 and taken from Morningstar. “The company (Friends Life) and Aviva PLC note the press speculation and confirm that they have reached agreement on the key financial terms of a possible all share combination of Aviva and the company (Friends Life). Under the terms of the Possible Offer, Aviva would acquire the entire Ords* capital of the company (Friends Life) on the basis of an exchange ratio of 0.74 Aviva Ords for each company Ords. The Possible Offer represents an indicative value of approximately 399p per company share. Aviva is required, by not later than 19 December 2014, to either announce a firm intention to make an offer or announce that it does not intend to make an offer.” Ords* means ‘ordinary’ class of share Discuss the impact on the share price of Friends Life and Aviva using the framework of Efficient Market Hypothesis (EMH) following the above news announcement. The starting time for discussion is November 21 2014 and the cut-off time for discussion is February 13 2015. Present your finding in a report format no longer than 2500 words. You might include data and valuation result in the format of tables in the appendix. References and appendixes will not be included in the final word count. 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