Assignment On Hypothetical company

my case company is HVN, please follow Harvard style. attempt only part 2 and part 3 please

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Finance

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Table of Contents
Question 2..................................................................................................................................3
a).............................................................................................................................................3
b)............................................................................................................................................3
Question 3..................................................................................................................................3
a).............................................................................................................................................3
References..................................................................................................................................6
Appendix....................................................................................................................................7

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Question 2
a)
The expected return for the company HVN and hypothetical are calculated and they are as
provided hereunder:
Particulars HVN Hypothetical
company
Risk free rate (Rf) 0.68 0.68
Market risk premium
(Rp)
5.5 5.5
Beta (b) 0.62 1.6
CAPM Rf + b*Rp
Expected return 4.09 9.48
b)
Particulars Weights Expected
return
Beta Weighted
return
weighted
beta
HVN 0.7 4.09 0.62 2.863 0.434
Hypothetical
company
0.3 9.48 1.6 2.844 0.48
Portfolio return 5.71
Portfolio beta 0.91
Question 3
a)
Harvey Norman is the company which has been founded in 1982 and is involved in providing
the individual franchisees with the franchise. They are involved in selling the products from
various departments and that includes a computer, communication, furniture and electrical
goods. There are several brands under which the company operates franchised complexes.
The company is also involved with media placements and property investments (Capitaliq,
2020). It lies under the general merchandise stores industry and has seen the changes in the
recent period because of the coronavirus. This is considered as the risk for the company and
the industry as all the business is affected. The economy is facing the downfall because of
this and that affects the company as well in an adverse manner.

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There is a negative impact as all the businesses are temporarily closed and the trading is not
taking place which is affecting the profitability and cash flow of the business. The economy
is declining as the returns are not available and that will affect the business and the market in
the long-term as heavy losses are being made.
In the business, there are various stocks that are involved and in which the investment is
made by people. All of them consider various aspects before making the decision and in that
most important are the return and risk associated with them. The return which is expected by
the shareholders is required to be identified as that forms the base for all the decisions. This is
required to be calculated and for that various approaches are available. In the current case,
there is the use of the capital asset pricing model which is considered to be most appropriate
(Gagliardini and Gouriéroux, 2013). The method considers the risk free rate which is
prevailing in the market and then adjusts the market premium according to the involved risk
with the help of beta. The same is done and calculation for HVN and the hypothetical
company has been made. The return is calculated and it is derived to be 4.09% for the HVN
and 9.48% for the hypothetical company. It can be noted that the risk-free rate is a very low
level and with that, the beta of HVN is also low which provides with the lesser expected
returns. In comparison to this, the Hypothetical Company is making higher returns because
the beta of the same is at a high level of 1.60.
0 1 0.62 1.6
0
1
2
3
4
5
6
7
8
9
10
0.68
6.18
4.09
9.48
SML
CAPM
Beta
Return
The security market line is the line that represents the beta and the return which is made
under the capital asset pricing model. In the given case also there is the calculation of the
return with the help of CAPM and all of the returns which are made in respect of the risk-free

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asset, market and others are represented with the help of the graph. It can be noted that the
highest return is for the hypothetical company which is having a major risk. It shows the
relation between the risk and return and which demonstrates that with the higher risk there
will be more returns which will be earned. The risk-free asset is considered and in that the
beta is at zero as there is no risk which is involved. Due to this the return which is made on
the same is also limited to the risk-free rate and no other returns are available. Then the
market stock is taken into account with the beta of 1 which is perfect and in that situation, the
return which is available in the market is the total return which is made. There is a change in
the return corresponding to the change in the beta and this shows the relationships between
the risk and returns which is involved.
In the given case the two stocks are available which are for the company HVN and the
hypothetical company. In that, it can be noted that there is a higher risk under the
hypothetical company with the beta of 1.60 and HVN is having a beta of 0.62. There is a high
difference among them and due to that, the difference can also be noted in the return which is
made with the help of them. There is a higher return with the hypothetical stock and that is at
9.48% and the HVN is having a return of 4.09%. This shows that the company which is
having a higher beta is having a higher return and vice versa. The complete relationship can
be understood in an effective manner with the help of the calculation and the results that have
been derived.
According to this, the HVN is below the level of market premium which is involved at 5.50%
and this will be considered to be a negative factor for the same. The portfolio theory is
involved and according to that if the diversification is made then the risk which is involved in
the portfolio can be minimized (Teller, 2013). The risk which is involved in the company
comprises of two elements and they are systematic risk and unsystematic risk. The risk which
is due to unavoidable factors and that cannot be eliminated is considered as the systematic
risk and the remaining after this is an unsystematic risk. It is not possible for the company to
remove the systematic risk but the unsystematic can be reduced. This will be done with the
help of the creation of the portfolio by which the diversification will be made possible. In the
given case there is the portfolio that is designed with the HVN and hypothetical company.
The weights for the same have been decided and according to that HVN will comprise of
70% portion and the remaining 30% will be possessed by the hypothetical company.

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The same has been considered and with the help of available information calculation for the
portfolio has been made. The expected return of the portfolio is ascertained and that is
derived at 5.71%. This is the rate that will be made by the portfolio and is higher than the
market premium. This is beneficial and can be considered. The portfolio beta is also
considered and as the higher share is of HVN with the lower beta so by that the risk is also
reduced. The portfolio beta is ascertained at 0.91 which comprises both the stocks (Capitaliq,
2020). The individual betas have been considered and to evaluate the beta it is defined that if
the beta is less than 1 then the stock is less risky and defensive whereas the beta of more than
1 reflects the higher risk and aggressive stock. The Beta for HVN has been identified to be
0.62 which is less than one and this shows that there is less risk which is involved with the
HVN and the investments which are made by it. The hypothetical company, on the other
hand, has a higher beta of 1.6 which shows its high level of aggressiveness and the risk that is
involved with making the investment in the same. It can be said with this that the more
investment will be made in a hypothetical company then the overall beta will be more and
there will be more risk which will be involved with the same.
The systematic risk is denoted with the help of beta and so in case of HVN the expected
return is 4.09% and the beta is 0.62 so in this, the 0.62 portions of the return will be the
systematic risk which will not be eliminated and rest is the unsystematic risk (Prather, 2012).
The same can be applied for the hypothetical company and in that the systematic risk is
denoted by 1.60 part of the expected return which is 9.48%. This shows that the systematic
risk is higher in the case of the hypothetical company and that will have to be borne by the
investor as there is no aspect by which it can be avoided. For the same evaluation the
portfolio return and beta are also calculated and they show the return of 5.71% and a beta of
0.91. The systematic risk in this will be up to the level of beta and after that, there will be an
unsystematic risk.
In the beta, there are the involvements of various elements such as operational and financial
risk. The risk which is related to the operational position of the business is considered as the
operational risk and that which is in relation to the financial leverage is the financial risk
(Hofman, Spalek and Grela, 2017). They both are important and shall be considered. from
this evaluation, it can be said that the portfolio will be of advantage as by this the risk is
brought to below 1 which shows that the portfolio will not be much aggressive and also the
return which is lower than the market premium for HVN is brought above them. This reflects

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the portfolio with moderate risk and return. Certain other factors will be considered and will
help in eliminating the risk further so the return can be increased.

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References
Capitaliq. (2020) Australia Government Debt Interest Rate Profile. [Online] Available at:
https://www.capitaliq.com/CIQDotNet/MacroEconomics/InterestRate.aspx?
companyId=50027527 [Accessed 13 April 2020]
Capitaliq. (2020) Harvey Norman Holdings Limited (ASX:HVN) Public Company Profile.
[Online] Available at: https://www.capitaliq.com/CIQDotNet/company.aspx?
companyId=6478902 [Accessed 13 April 2020]
Gagliardini, P. and Gouriéroux, C. (2013) Granularity adjustment for risk measures:
Systematic vs unsystematic risks. International journal of approximate reasoning, 54(6),
pp.717-747.
Hofman, M., Spalek, S. and Grela, G. (2017) Shedding new light on project portfolio risk
management. Sustainability, 9(10), p.1798.
Prather, L.J. (2012) Portfolio risk management implications of mutual fund investment
objective classifications. Journal of Financial Risk Management, 1(03), p.33.
Teller, J. (2013) Portfolio risk management and its contribution to project portfolio success:
An investigation of organization, process, and culture. Project Management Journal, 44(2),
pp.36-51.

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Appendix

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