Portfolio Analysis of CBA and Rio Tinto

This assignment delves into a comparative analysis of two publicly traded companies, CBA (Commonwealth Bank of Australia) and Rio Tinto, focusing on their investment potential. Students are required to calculate various financial metrics, including holding period returns, standard deviations, beta coefficients, and expected returns for both stocks. The task involves constructing a portfolio consisting of these two stocks with specified weightages and determining its overall return, risk level (beta), and comparing it to the individual companies' performance. The analysis culminates in an investment recommendation based on the calculated metrics.

Running head: MASTERS OF PROFESSIONAL ACCOUNTING
Masters of Professional Accounting
Name of the University
Name of the student
Authors note

1MASTERS OF PROFESSIONAL ACCOUNTING
Table of Contents
Answer to Question 1:................................................................................................................2
Requirement a:.......................................................................................................................2
Requirement b:.......................................................................................................................2
Requirement c:.......................................................................................................................3
Requirement d:.......................................................................................................................3
Requirement e:.......................................................................................................................3
Answer to Question 2:................................................................................................................4
Requirement 1:.......................................................................................................................4
Requirement 2:.......................................................................................................................5
Answer to Question 3:................................................................................................................6
Requirement i:........................................................................................................................6
Requirement ii:.......................................................................................................................7
Requirement iii:......................................................................................................................8
Requirement iv:......................................................................................................................8
Requirement v:.......................................................................................................................9
Requirement v:.......................................................................................................................9
Requirement vi:....................................................................................................................10
Requirement vii:...................................................................................................................10
Requirement viii:..................................................................................................................10
Reference:................................................................................................................................11

2MASTERS OF PROFESSIONAL ACCOUNTING
Answer to Question 1:
Requirement a:
Particulars Amount
Total Fund Desired A $10,000
Periodic Payments B $800
Interest Rate p.a. C 10%
Nos. of Payments p.a. D 2
Compound Interest E=C/D 5.00%
Total nos. of Payments F=NPER(E,B,0,(-A)) 9.95
Nos. of Full Payments G=F-0.95 9
Size of Concluding Payment H=Bx(F-G) $760
Requirement b:
Particulars Amount
Total Value of Lottery A $200,000
Initial Withdraw B $20,000
Investment Value C=A-B $180,000
Rate of Interest p.a. D 10%
Deferred Period (in years) E 4
Future Investment Value
after 4 years F=Cx(1+D)^E $263,538
Monthly Rate of Interest G=D/12 0.83%
Nos. of Monthly Payments H 180
Size of Equal Payments
I=(GxF)/[1-(1+G)^-
H] $2,832

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Requirement c:
Particulars Amount
Annual Deposit A $4,000
Interest Rate p.a. B 5%
Nos. of Deposits C 11
Total Deposit Amount in
2017
D=(1+B)xA[{(1+B)^C
-1}/B] $59,669
Requirement d:
It is better to not to sale the right now, as it would cause loss, which is shown in the
following table:
Particulars Amount
Annual Payment A $20,000
Interest Rate p.a. B 6%
Nos. of Deposits C 10
Present Value of the Total
Payments
D=(1+B)xA[{1-
(1+B)^-C}/B] $156,034
Current Sale Price of Future
Rights E $150,000
Loss on Sales F=E-D ($6,034)
Requirement e:
Period
Growth in Annual
Payments
Annual
Annuity
Discoun
t Rate
Discounted
Annuity
A B C D
E=C/
((1+D)^A)
1 0% $1,000 12% $893
2 10% $1,100 12% $877

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3 10% $1,210 12% $861
4 10% $1,331 12% $846
5 10% $1,464 12% $831
6 10% $1,611 12% $816
7 10% $1,772 12% $801
8 10% $1,949 12% $787
9 10% $2,144 12% $773
10 10% $2,358 12% $759
Cost of Annuity $8,244
Answer to Question 2:
Requirement 1:
The concept of maximization of shareholders wealth is that it focuses on enhancing
the overall value of business instead of focusing on short-terms benefits or returns. On other
hand, concept of maximization of profit is essentially a short-term approach that does not
lead to increased value of business. The main objective of maximizing the wealth of
shareholders is that it results in efficiently allocating capital and maximizing the return on
capital. The concept is related with increasing the shareholders wealth by increasing the
business value (Bae et al., 2014).
Maximizing the wealth of shareholders is one of the universally accepted objectives
of any organization. The concept of maximizing the wealth of shareholders came into being
after the concept of profit maximization. Value of shareholders would improve with the
increase in price of shares that is regarded as the net worth business function. The drawbacks
of maximization of profit model are obviated by the employment of model of wealth
maximization. Capital investments made by organization should be able to generate return
that is more than the required rates of return such investments made such that this would lead
to maximizing the wealth of shareholders. However, an increase in profit of organization

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indirectly increases the wealth of shareholders. This is so because this would generate higher
dividend payment to shareholders that would involve long-term pay offs to customers.
Maximization of wealth of shareholders is the responsibility of management by
allocating resources in way that would help in generating highest returns and at the same time
mitigating the risks. A detailed and in depth analysis if cash flow associated with investments
is required to be conducted by management.
Requirement 2:
Risk averse investors are one when they are face with two investment decisions, they
would prefer the investments with lower risks. Their portfolio comprise of assets that does
not carry any risks and generates a fixed income. Such types of investors prefer making
investments in government bonds, treasury bills, fixed deposits and certificate of deposits that
generates lower rate of return. However, they often lose out on higher return by not making
investments in capital assets that has the opportunity of providing investors with higher
return. They often lag behind investing in right investment vehicle and are not able to
participate in the market (Deguest et al., 2013).
Making an investment in lower return and risk free assets deprive them of advantage
that is generated from growth of market and higher level of profits. The establishment of
relationship volatility and high level of profits is difficult for such investors. Making
investments in risky assets would provide long-term benefits to investor seeking investment
in such assets. Expected returns for investors are lower for investors who are willing to take
additional risks on their investments. There always exists trade off between risk and returns
generated by investments. Investment with lower risk generates lower return and investments
with higher risks generate higher returns. Apprehension of investors investing in risky assets

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is mainly because of the fall in stock value in market. Tax advantage is the main benefits of
making investment in capital market assets (Harlow & Brown, 2016).
It is essential for corporate managers to make optimum allocation between risky
assets and risk free assets. Some additional costs are involved in making investments in long-
term assets and strategies that should be adopted by organization is incorporating the level of
tolerable risks and generates desirable level of returns. However, it can be said that
investments in risky asset leads to increased business risks and therefore, corporate managers
should not always undertake investments in risk free assets.
Answer to Question 3:
Requirement i:
CBA Rio Tinto All Ordinary Index
Date Stock Price
Holding
Period
Return Stock Price
Holding
Period
Return Stock Price
Holding
Period
Return
1/31/2016 59.99 40.28 4947.90
2/29/2016 66.61 11.04% 42.69 5.98% 5151.80 4.12%
3/31/2016 65.70 -1.37% 51.55 20.75% 5316.00 3.19%
4/30/2016 68.84 4.79% 44.69 -13.31% 5447.80 2.48%
5/31/2016 66.12 -3.95% 45.50 1.81% 5310.40 -2.52%
6/30/2016 68.77 4.01% 49.56 8.92% 5644.00 6.28%
7/31/2016 63.85 -7.16% 47.60 -3.95% 5529.40 -2.03%
8/31/2016 67.17 5.21% 51.61 8.42% 5525.20 -0.08%
9/30/2016 68.09 1.37% 54.18 4.98% 5402.40 -2.22%
10/31/2016 72.97 7.17% 57.75 6.59% 5502.40 1.85%
11/30/2016 76.46 4.78% 59.90 3.72% 5719.10 3.94%
12/31/2016 75.77 -0.91% 66.68 11.32% 5675.00 -0.77%

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2/1/2016
3/1/2016
4/1/2016
5/1/2016
6/1/2016
7/1/2016
8/1/2016
9/1/2016
10/1/2016
11/1/2016
12/1/2016
-20.00%
-15.00%
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
CBA Rio Tinto All Ordinary Index
Requirement ii:
CBA Rio Tinto All Ordinary Index
Date Stock Price
Holding
Period
Return Stock Price
Holding
Period
Return Stock Price
Holding
Period
Return
1/31/2016 59.99 40.28 4947.90
2/29/2016 66.61 11.04% 42.69 5.98% 5151.80 4.12%
3/31/2016 65.70 -1.37% 51.55 20.75% 5316.00 3.19%
4/30/2016 68.84 4.79% 44.69 -13.31% 5447.80 2.48%
5/31/2016 66.12 -3.95% 45.50 1.81% 5310.40 -2.52%
6/30/2016 68.77 4.01% 49.56 8.92% 5644.00 6.28%
7/31/2016 63.85 -7.16% 47.60 -3.95% 5529.40 -2.03%
8/31/2016 67.17 5.21% 51.61 8.42% 5525.20 -0.08%
9/30/2016 68.09 1.37% 54.18 4.98% 5402.40 -2.22%
10/31/2016 72.97 7.17% 57.75 6.59% 5502.40 1.85%
11/30/2016 76.46 4.78% 59.90 3.72% 5719.10 3.94%
12/31/2016 75.77 -0.91% 66.68 11.32% 5675.00 -0.77%
Average Monthly
Holding Period
Return 2.27% 5.02% 1.29%

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Requirement iii:
CBA Rio Tinto All Ordinary Index
Date Stock Price
Holding
Period
Return Stock Price
Holding
Period
Return Stock Price
Holding
Period
Return
1/31/2016 59.99 40.28 4947.90
2/29/2016 66.61 11.04% 42.69 5.98% 5151.80 4.12%
3/31/2016 65.70 -1.37% 51.55 20.75% 5316.00 3.19%
4/30/2016 68.84 4.79% 44.69 -13.31% 5447.80 2.48%
5/31/2016 66.12 -3.95% 45.50 1.81% 5310.40 -2.52%
6/30/2016 68.77 4.01% 49.56 8.92% 5644.00 6.28%
7/31/2016 63.85 -7.16% 47.60 -3.95% 5529.40 -2.03%
8/31/2016 67.17 5.21% 51.61 8.42% 5525.20 -0.08%
9/30/2016 68.09 1.37% 54.18 4.98% 5402.40 -2.22%
10/31/2016 72.97 7.17% 57.75 6.59% 5502.40 1.85%
11/30/2016 76.46 4.78% 59.90 3.72% 5719.10 3.94%
12/31/2016 75.77 -0.91% 66.68 11.32% 5675.00 -0.77%
Annual Holding
Period Return 1.96% 4.29% 1.15%
Requirement iv:
CBA Rio Tinto All Ordinary Index
Date Stock Price
Holding
Period
Return Stock Price
Holding
Period
Return Stock Price
Holding
Period
Return
1/31/2016 59.99 40.28 4947.90
2/29/2016 66.61 11.04% 42.69 5.98% 5151.80 4.12%
3/31/2016 65.70 -1.37% 51.55 20.75% 5316.00 3.19%
4/30/2016 68.84 4.79% 44.69 -13.31% 5447.80 2.48%
5/31/2016 66.12 -3.95% 45.50 1.81% 5310.40 -2.52%
6/30/2016 68.77 4.01% 49.56 8.92% 5644.00 6.28%
7/31/2016 63.85 -7.16% 47.60 -3.95% 5529.40 -2.03%
8/31/2016 67.17 5.21% 51.61 8.42% 5525.20 -0.08%
9/30/2016 68.09 1.37% 54.18 4.98% 5402.40 -2.22%
10/31/2016 72.97 7.17% 57.75 6.59% 5502.40 1.85%
11/30/2016 76.46 4.78% 59.90 3.72% 5719.10 3.94%
12/31/2016 75.77 -0.91% 66.68 11.32% 5675.00 -0.77%
Standard Deviation 5.26% 8.64% 2.99%

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Requirement v:
0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
0%
1%
2%
3%
4%
5%
Series2 CBA Rio Tinto
Requirement v:
CBA Rio Tinto
Date Stock Price
Holding
Period
Return Stock Price
Holding
Period
Return
Long Term Market
Return 7% 7%
Risk Free Rate 3.25% 3.25%
Beta 1.1 0.95
Expected Returns 7.38% 6.81%

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Requirement vi:
0 0.2 0.4 0.6 0.8 1 1.2
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
Security Market Line
Series2
Linear (Series2)
CBA
Linear (CBA)
Rio Tinto
Linear (Rio Tinto)
Beta
Return Rate
Requirement vii:
CBA Rio Tinto
Date Stock Price
Holding
Period
Return Stock Price
Holding
Period
Return
Beta 1.1 0.95
Expected Returns 7.38% 6.81%
Weightage 60% 40%
Portfolio Return 7.15%
Portfolio Beta 1.04
Requirement viii:
The portfolio would provide higher return than Rio Tinto and would be less volatile
than CBA. Hence, the investors should select the portfolio for investment purpose.

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Reference:
Bae, G. I., Kim, W. C., & Mulvey, J. M. (2014). Dynamic asset allocation for varied financial
markets under regime switching framework. European Journal of Operational
Research, 234(2), 450-458.
Bodie, Z., Kane, A., & Marcus, A. J. (2014). Investments, 10e. McGraw-Hill Education
DeFusco, R. A., McLeavey, D. W., Anson, M. J., Pinto, J. E., & Runkle, D. E.
(2015). Quantitative investment analysis. John Wiley & Sons
Deguest, R., Martellini, L., & Meucci, A. (2013). Risk parity and beyond-from asset
allocation to risk allocation decisions.
Harlow, W. V., & Brown, K. C. (2016). Market Risk, Mortality Risk, and Sustainable
Retirement Asset Allocation: A Downside Risk Perspective. Journal of Investment
Management, 14(2), 5-32.