PART II
1. According to my research, the first incident is Sonic Healthcare’s share price has declined more than 6% in the past month during mid year of 2017 just to trade around $22.67 while the S&P or ASX 200 is rose over 1%. Besides, the share price of its competitor, the Primary Healthcare Limited Berhad also sink 4.8% over the past few months. Based on last year’s earnings and the current price, Sonic Healthcare owns a P/E ratio of 20.6x while the P/E ratio of Primary Healthcare is 20x.
Thus, the fall of share price could be affected by the inflation risk. Inflation risk is under the systematic risk. Systematic risk also known as non-diversifiable risk. It can be interpreted as a risk which due to the influence of external factors to an organization. As I mentioned, it is non-diversifiable which means that it is uncontrollable from organisation’s point of view. The examples of systematic risk are interest rate risk and market risk.
Back to the point, why is the share price of Sonic Healthcare affected due to the inflation risk? The reason is the Sonic Healthcare is more to provide radiology, medical clinics, pathology and diagnostic imaging services over New Zealand, Europe, Australia and United States. The demand inflation risk and cost inflation risk could affect all organisations as the share price of Primary Healthcare dropped too. Demand inflation risk happens due to the increase in price due to an excess of demand over supply or when the production factors are under maximum utilization. Cost inflation risk arises due to sustained increase in the prices of goods and services which caused by the higher production cost.
The second incident I searched is the cease of a substantial holder on 9 March 2017. With this, it affected the share price of the Sonic Healthcare alone only. The decrease of its share price is due to the failure of operational management which only happened in Sonic Healthcare Limited Berhad.
The cease of as substantial holder is under unsystematic risk. Unsystematic risk is the risk which is specific to a firm or an industry only. Unsystematic risk also called as diversifiable risk. The examples are business risk and operational risk. This type of risk can be controlled by pooling a portfolio with significant diversification to ensure that the single event affects only a limited number of the assets. Unsystematic risk is measured through standard deviation.
The link below showed the evidence of the ceasing of a shareholder.
http://asxcomnewspdfs.fairfaxmedia.com.au/2017/03/14/01838347-1501511415.pdf
2.
Investors always wanted to know the amount of return they will receive after a period of time either in a short term or a long term. Of course, the returns will vary from time to time. Thus, to give a sense for those investors, monthly average returns of investments have been calculated. Monthly average return defined as the average period of returns rescaled to a period of one month. From the research, we can see that the monthly average return of Sonic Healthcare is 0.0021 while the average return for market is 0.0110. Realised, the monthly average return of market is higher than Sonic Healthcare by 0.0089.
Next, standard deviation is used as a measurement for the value received as an return can vary from the average return. In another word, it is used to measure the volatility and risk of an investment. The risk measured by standard deviation is more to unsystematic risk such as operational risk and liquidity risk. Higher value of the standard deviation is associated with higher levels of uncertainty (risk). According to the summary above, Sonic Healthcare is having higher risk compared to the market price. Sonic Healthcare owns a number of 0.1393 while the level of market risk is 0.1328. The difference between both is 0.0065.
The third measurement is covariance. Covariance is a tool which applied to the measure of how one variable differs with another variable. In simply says, It describes the variance between two or more sets of random or isolated variables. The covariance of Sonic Healthcare and market are both the same which is -0.0167. The negative covariance indicates the higher average values of one variable tends to match with another variable which has lower value. Both of the variables are not moving together when it comes to negative covariance.
Next measurement in this research is about correlation coefficient. Correlation coefficient is used to measure the linear relationship (correlation) between a dependant variable and an independent variable. Also, to determine how strong the relationship is between two variables. The correlation coefficient of Sonic Healthcare and market is -0.9180. A correlation coefficient with the value of -1 means that for every positive increase of 1 in one variable will affect another variable to decrease by 1. Thus, Sonic Healthcare and market have a strong negative relationship since the correlation coefficient is in negative.
Beta ( ß) can be interpreted as the sensitivity / fluctuation / responsiveness of a stock’s price changes in the overall stock market. Beta acts as a benchmark index. It is used to measure systematic risk which can’t be diversified such as interest rate risk and inflation risk. The beta of Sonic Healthcare is -0.86073144 while the beta of market is -0.94719794. As shown above, Sonic Healthcare is less volatile because beta is below 1. A stock with beta lower than 1 is expected to fluctuate slower than the market. Negative beta value interpreted that stocks generally move in opposed direction with the market and vice versa.
3.1 Beta ( ß ) = W₁( ß₁) + W₂( ß₂)
Since W₁ = 1 – W₁
ßp = W₁( ß₁) + [(1-W₁)( ß₂)]
-0.9630 = W₁(-0.9630) + [(1-W₁) * 1]
W₁ = 100%
3.2 Variance (Rp) = W₁²SD(R₁)² + W₂²SD(R₂)² + 2W₁W₂Corr(R₁,R₂)SD(R₁)SD(R₂)
= (0.3)²(0.1393)² + (0.7)²(0.1328)² + 2(0.3)(0.7)(-0.9180)(0.1393) (0.1328)
= 0.09(0.0194) + 0.49(0.0176) + (-0.0071)
= 0.0033
Standard deviation = √ variance (Rp)
= √ 0.0033
= 0.0574
4. Assume an annual market risk premium of 6% and the 10 year government bond rate of 2.6%. Your stock was selling for $21.12 on 30 June 2017. You expect the stock to sell for $22.59 in a year. the stock is overpriced therefore I should sell it.
Expected return = Risk free rate + Beta (Market premium)
= 0.026 + ( -0.9472 ) 0.06
= 0.0828 ( 8.28% )
Growth rate = rE – ( Div₁ / P₀ )
= 0.0828 – ( 0.3366 / 21.12 )
= 0.0669 ( 6.69% )
P₁ = [ Div₁ ( 1 + g ) ] / ( rE – g )
= [ 0.3366 ( 1 + 0.0669 ) ] / ( 0.0828 – 0.0669 )
= $22.59
Realised return = ( P₁ – P₀ ) / P₀
= ( 22.59 – 21.12 ) / 21.12
= 0.0696 ( 6.96% )