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Agronomics Limited
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== Risks == As with any investment, investing in Agronomics carries a level of risk. Overall, based on the Agronomics' adjusted beta (i.e. 1.40)<ref name=":4">Research shows that an investment has two main types of risks: 1) non-systematic and 2) systematic. Systematic risk is the risk related to the overall market, and non-systematic risk is the risk that's specific to an individual investment. Evidence shows that taking on non-systematic risk is inefficient, and it's, therefore, best to eliminate it; and in most cases, elimination is fairy easy to do [by holding a diversified portfolio of investments (i.e. around 15 investments)]. Accordingly, when assessing the riskiness of an investment, it’s best to look at the systematic risk only (i.e. ignore the non-systematic risk). A key measure of systematic risk is beta, and a main way to determine the riskiness of an investment is to compare the beta of the investment with the beta of the market, which is 1. For estimating an asset's beta, in terms of time period, and frequency of observations, the most common choice is five years of monthly data, yielding 60 observations. One study of U.S. stocks found support for five years of monthly data over alternatives. The beta value in a future period has been found to be on average closer to the mean value of 1.0, the beta of an average-systematic-risk security, than to the value of the raw beta. Because valuation is forward looking, it is logical to adjust the raw beta so it more accurately predicts a future beta.</ref>, the degree of risk associated with an investment in Agronomics is 'medium'. Here, to estimate the adjusted beta, we used the iShares MSCI World ETF to represent the market portfolio; and in terms of the time period and frequency of observations, we used five years of monthly data (i.e. 60 observations in total), which is supported by a study and is the most common choice. The beta value in a future period has been found to be on average closer to the mean value of 1.0, and because valuation is forward-looking, it is logical to adjust the raw beta so it more/most accurately predicts a future beta. In addition, here, we have assumed that for an investment to be considered 'medium' risk, it must have a beta value of between 0.5 and 1.5. Further information about the beta ratings can be found in the appendix section of this report. The key risks can be found below. For us, currently, the biggest risk to the valuation of the company relates to ccc. === Credit risk === Credit risk is the risk of loss associated with the counterparty’s inability to fulfil its obligations. The Company’s credit risk is primarily attributable to receivables, cash balances, and cash deposits, with the maximum exposure being the reported balance in the statement of financial position. The Company has a nominal level of debtors and as such the Company believes that the credit risk to these is minimal. The Company holds available cash and cash deposits with licensed banks and financial institutions. The Company considers the credit ratings of banks in which it holds funds in order to reduce exposure to credit risk. Cash balances are available on demand, with cash deposits having varying maturities up to 6 months. === Market price risk === Market price risk is the risk that the market price will fluctuate due to macro-economic issues such as changes in market factors specific to that security, market interest rates and foreign exchange rates. The Company is exposed to significant market price risks as financial instruments recognised directly by the Company and indirectly by the Subsidiary are linked to market price volatility. A 10% increase/decrease in market value of investments held by the Company and its subsidiary would increase/decrease equity and profit by £9,481,309 (2021: £3,877,068). Taking into account the Shellbay consulting fee, the increase/decrease in equity and profit would be £10,903,505 (2021: £4,458,628). === Liquidity risk === The Company is exposed to liquidity risk to the extent that it holds investments that it may not be able to sell quickly at close to fair value. The risk is managed by the Company by means of cash flow planning to ensure that future cash requirements are anticipated and, where financial instruments have to be sold to meet these requirements, the process is carried out in a controlled manner intended to minimise the liquidity risk involved. === Interest rate risk === A significant share of the Company’s assets is comprised of cash held at banks. As a result, the Company is subject to risk due to fluctuations in the prevailing level of market interest rates. However, income earned from bank interest is not considered material to the Company’s performance or financial position. The Company holds investments in convertible loan notes (“CLN”), which attract interest income. The rates of interest are fixed for each CLN investment held, which results in a reduced interest rate risk. '''Fair values of financial assets and liabilities''' At 30 June 2022, the carrying amounts of cash resources, trade and other receivables, and trade and other payables approximate fair value due to their short-term maturities. '''Foreign currency risk''' The Company is exposed to foreign currency risk on fluctuations related to financial assets and liabilities held directly itself and indirectly via its subsidiary that are denominated in a number of currencies. The Investment in Subsidiary is held in Sterling. The analysis below reflects the underlying currency exposure in the Subsidiary’s portfolio.
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