Reference no: EM132613370
Sarona limited have been investing in frontier and emerging markets for 10 years under the banner "Business Solutions to Poverty". Until very recently, the only way to channel growth capital to entrepreneurs in Emerging Markets was by providing direct loans and equity capital on a "fly in - fly out" basis. It is a relatively risky strategy: investors based thousands of miles away from investee companies can do little more than provide financing and hope that it will be used wisely. Over the last ten years or so, Sarona monitored the growth of a locally-based private equity industry backed by development finance institutions. By 2009, Sarona felt that the time had come for a strategic shift away from direct investing and towards supporting local small and medium-size enterprises through the selection of top quality, locally-based private equity teams. Sarona limited applies several strategies when making investment decisions. These include: 1) careful selection based on long experience 2) diversification 3) Technical analysis and 4) Fundamental analysis. By shifting to a fund-of-fund model, Sarona can continue to apply its experience in selecting the best managers and can construct diversified portfolios across a variety of sectors. Sarona limited just 40% of the shares of Greenwood ltd. The following table presents ten years of return data for the stock of Sarona limited and for the market index.
Year 1 2 3 4 5 6 7 8 9 10
Sarona limited (%) 8.1 3.0 5.3 1.0 -3.1 -3.0 5.0 3.2 1.2 1.5
Market index (%) 8.0 0.0 14.9 5.0 14.1 18.9 10.1 5.0 1.5 2.4
Required
i) What are the benefits of investing in a diversified portfolio?
ii) Outline the main differences between private equity and public equity
iii) Distinguish between direct investing and indirect investing
iv) Explain how the following investment strategies can be applied in your local stock market: a) Technical analysis, b) Fundamental analysis
v) What are the qualities of a good fund manager?
vi) Explain how diversification across a variety of sectors can be executed
vii) Plot the returns of Sarona limited and the market index on a graph, with the market index's returns on the horizontal axis
viii) Derive the line of best fit using the ordinary least squares method
ix) Estimate the beta factor of Sarona ltd stock and comment on your result