• We are pleased to announce that the winner of our Feedback Prize Draw for the Winter 2024-25 session and winning £150 of gift vouchers is Zhao Liang Tay. Congratulations to Zhao Liang. If you fancy winning £150 worth of gift vouchers (from a major UK store) for the Summer 2025 exam sitting for just a few minutes of your time throughout the session, please see our website at https://www.acted.co.uk/further-info.html?pat=feedback#feedback-prize for more information on how you can make sure your name is included in the draw at the end of the session.
  • Please be advised that the SP1, SP5 and SP7 X1 deadline is the 14th July and not the 17th June as first stated. Please accept out apologies for any confusion caused.

Sa4 assignment x5

A

Ali10

Member
Hi

I am working through this question but have become a bit stuck on deriving an assumption for equity returns in part (iii). I am not sure how to use the information given. If dividend yields are unchanged would we just use the same assumption as per the previous year?

Thanks
 
Also, in part (iv) where we have to estimate the mv of assets at the y/end, how would you do this for the bond holdings? All I can think is that if the yield has decreased by 0.25% the price must have increased by a similar percentage.
 
Hi Ali10

With regards to your first question, you are right, that it would also be acceptable to assume the return on equity is unchanged (and indeed credit would be given for this under the third point in the solution).

As for your second question - if the yield drops by 0.25% per annum, then the price of the asset increases by 0.25% x duration of the asset or 1.0025 ^ duration of the asset. Here the duration of the asset is taken to be 15 years, so a 0.25% drop in yield would lead to a price increase of about 1.0025^15 or .25% x 15 which is approx 3.8%. (This is given credit in the 4th point in the solution.)

I hope this helps.

Best wishes

Stuart

Stuart Underwood
ActEd Tutor
 
You must log in or register to reply here.
Back
Top