Investment Analysis: CBA vs. Rio Tinto

This assignment requires a comprehensive analysis of investment opportunities in two Australian companies: Commonwealth Bank (CBA) and Rio Tinto. Students must calculate holding period returns, analyze stock price data, determine beta coefficients, and estimate expected returns for each company. The task also involves constructing a diversified portfolio based on these findings, calculating its overall return and risk (beta), and comparing it to the individual companies' performance. Finally, students need to provide recommendations on the most suitable investment option based on their analysis.

Running head: ACCOUNTING & FINANCE
Accounting & Finance
Name of the University
Name of the student
Authors note

1ACCOUNTING & FINANCE
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:......................................................................................................................9
Requirement iv:......................................................................................................................9
Requirement v:.....................................................................................................................10
Requirement v:.....................................................................................................................10
Requirement vi:....................................................................................................................11
Requirement vii:...................................................................................................................11
Requirement viii:..................................................................................................................11
Reference:................................................................................................................................12

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Answer to Question 1:
Requirement a:
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
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

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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 would be ideal not to sale off at the present time period, as this would result to a
loss and this has been explained in the underlying 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 maximisation perception of the income of the shareholders tries to contemplate
on developing the overall valuation of the organization and does not ponder on the earnings
of the advantages that are in nature short term. On the other hand, it is noticed that the
perception of profit maximisation is crucially a method that is in nature short term and does
not result to an increase in the valuation of the organization (Olmo, & Laborda 2017). The
major aim of raising the returns of the shareholders has been that it results to precise
assignment of the resources of the wealth and raising the income from the investment. The
perception is related with improving the earnings of the shareholders and enhances the
valuation of the organization.
The rise in the wealth of the shareholders has been a goal that has been taken in to
consideration universally by any organization. The notion of raising the earnings of the
shareholders came into the idea after the profit maximisation mechanism came into existence.
The worth of the shareholders would enhance with the increase in the share prices that is
looked upon as the net worth of the organizational function. The restrictions of profit
enhancement model have been obviated by the staffs in the income maximisation model. The
income investments that has been commenced by the firms requires to have competence to

5ACCOUNTING & FINANCE
establish income that is more than the rate of returns that is essential like the investments
used in an effective manner so that it would result to an increase in the earnings of the
shareholders (Clare et al., 2016). This has been possible mainly as it would generate a higher
dividend payment to the shareholders that would be inclusive of the pay offs that are in nature
that are long term for the customers.
The method of enhancement of the wealth of the shareholders is the accountability of
the management with the help of the allocation of the resources in an effective manner that
would be aid in establishing the utmost revenue and in the same way lowering the degree of
risk. A detailed and in-depth assessment of the statement of cash flow with respect to
investment is essential to be made by the management.
Requirement 2:
The risk reluctant investors are regarded as the people who in situations when two
investment portfolios are given to them look to take investment in the portfolio that has a
decreased extent of risk. The investment selection of the investors comprises of the assets that
are risk free and provides an amount of return that is fixed. This kind of investors looks for
investing in areas like the fixed deposits, treasury bills, government bonds and the certificates
of deposit that establish a lower level of income. It is even seen that the investors mislay the
chance to obtain the higher returns by not making use of the investments on the assets that are
equity based and that has the power to provide higher rate of returns for the investors. These
investors most of the time lags behind with their investment strategies as they are unable to
make effective investments pools and therefore are incompetent to contend in the marjet.
The initiation of an investment in lowered assets and returns that does not have a
higher level of risks has an impact on the investors as it denies the investors from increased
growth in the market and higher level of profits. The establishment of an unstable

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relationship and the increasing level of revenue is difficult for the investors. The undertaking
of investments in risky assets would reap the profits that are in nature long term to the
investors who are seeking for taking in investments in these assets. The estimated returns for
the investors are lowering for the investors who have the aim of taking in additional risks
within their investments. There is a subsistence of trade-offs within the risks and the earnings
that is established with the help of the investments (Weber et al., 2016). The investments that
have a decreased degree of risk provides a diminishing level of profit and making use of the
assets that have higher risks would lead to higher level of returns. The apprehension of the
investors who undertake investments in the assets that are by nature risky has been crucially
due to the fall in the stock value in the market. It is seen that the benefits of tax are the
significant benefits of making use of the investments in the capitals assets of the market.
It is essential for the management of the organizations to take advantage of the
appropriate allocation of the resources that are in nature in risky and are assets that are in
nature risk free. There are certain additional expenditure that are related with the initiation of
the investments within the assets that are long term in nature and the strategies that demands
to be implemented that are desirable (Munnell et al., 2015). On the other hand, it can be
explained that the investments within the risk related assets leads to the increase in the
business threats and therefore the management requires to make investments in such assets
and reduce the level of investment that are free of risk in nature.
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

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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%
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%
Holding Period Return
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%

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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 of investment would provide higher returns than Rio Tinto and this has
been of a decreasingly unstable than CBA. Hence, the investors has to select the portfolio that
is eventful for the investment.