Business Finance

This document provides study material and solved assignments on Business Finance. It covers topics such as risk and return, portfolio analysis, and more. The document includes tables and calculations for computing continuously compounded return, expected return, standard deviation, correlation coefficient, beta, required rate of return, and portfolio risk and return. It also discusses spurious correlation and provides a reference and bibliography section.

Running head: BUSINESS FINANCE
Business Finance
Name of the Student:
Name of the University:
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Table of Contents
Part II: Risk and Return..............................................................................................................2
1. Computing continuously compounded return using daily data:............................................2
2. Computing Expected return:..................................................................................................8
3. Computing the standard deviation:........................................................................................8
4. Computing the (daily) return correlation coefficient:............................................................8
5. Commenting on the correlation coefficient between JBHIFI and Market:............................8
6. Calculating beta and detecting the difference between different results:..............................8
7. Computing the required rate of return using CAPM:.............................................................9
8. Computing the expected return and standard deviation of your portfolio:..........................10
9. Comparing and explaining the differences between the portfolio risk and return versus the
individual securities risk and return:........................................................................................10
10. Giving an example of spurious correlation and explain why it is called spurious
correlation:...............................................................................................................................11
Reference and Bibliography:....................................................................................................13

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Part II: Risk and Return
1. Computing continuously compounded return using daily data:
Date Market return jbhifi return
2018-01-
02 0.15% 2.27%
2018-01-
03 0.16% 0.67%
2018-01-
04 0.71% 1.98%
2018-01-
07 0.11% 2.09%
2018-01-
08 0.08% 2.74%
2018-01-
09 -0.57% -2.03%
2018-01-
10 -0.48% 4.34%
2018-01-
11 0.01% 1.31%
2018-01-
14 0.18% -0.64%
2018-01-
15 -0.35% 1.16%
2018-01-
16 -0.51% -1.81%
2018-01-
17 -0.06% -1.58%
2018-01-
18 -0.18% 1.19%
2018-01-
21 -0.21% -0.22%
2018-01-
22 0.73% 2.41%
2018-01-
23 0.29% -1.70%
2018-01-
24 -0.07% 1.31%
2018-01-
28 0.37% 1.47%
2018-01-
29 -0.85% -0.10%
2018-01-
30 0.18% 1.52%
2018-01- 0.85% -0.69%

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2018-02-
01 0.50% -2.23%
2018-02-
04 -1.64% -1.85%
2018-02-
05 -3.29% -2.43%
2018-02-
06 0.86% 0.55%
2018-02-
07 0.23% 2.28%
2018-02-
08 -0.97% 0.46%
2018-02-
11 -0.30% -8.34%
2018-02-
12 0.63% 2.14%
2018-02-
13 -0.29% 1.32%
2018-02-
14 1.15% 0.56%
2018-02-
15 -0.06% -0.52%
2018-02-
18 0.65% 3.38%
2018-02-
19 0.03% -0.47%
2018-02-
20 0.03% 0.33%
2018-02-
21 0.17% -3.46%
2018-02-
22 0.78% 0.75%
2018-02-
25 0.67% 1.11%
2018-02-
26 0.21% -1.93%
2018-02-
27 -0.68% -2.85%
2018-02-
28 -0.68% 0.61%
2018-03-
01 -0.78% -0.50%
2018-03-
04 -0.53% -0.31%
2018-03-
05 1.08% 1.84%
2018-03-
06 -0.93% -1.18%

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2018-03-
07 0.68% 1.37%
2018-03-
08 0.37% -0.57%
2018-03-
11 0.53% -1.11%
2018-03-
12 -0.40% -0.85%
2018-03-
13 -0.57% 0.31%
2018-03-
14 -0.25% 0.00%
2018-03-
15 0.45% 1.34%
2018-03-
18 0.16% 0.04%
2018-03-
19 -0.39% -0.57%
2018-03-
20 0.20% 1.30%
2018-03-
21 -0.16% -0.68%
2018-03-
22 -1.91% -2.43%
2018-03-
25 -0.47% 0.66%
2018-03-
26 0.71% 0.58%
2018-03-
27 -0.75% -0.43%
2018-03-
28 -0.51% 0.04%
2018-04-
03 -0.17% -2.00%
2018-04-
04 0.08% 1.96%
2018-04-
05 0.41% 0.73%
2018-04-
06 -0.02% 0.31%
2018-04-
09 0.30% 0.50%
2018-04-
10 0.79% -0.19%
2018-04-
11 -0.44% -0.58%
2018-04-
12 -0.24% -0.77%
2018-04- 0.22% -0.12%

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13
2018-04-
16 0.14% 0.00%
2018-04-
17 0.02% -1.56%
2018-04-
18 0.37% 2.22%
2018-04-
19 0.34% -0.15%
2018-04-
20 -0.20% -2.23%
2018-04-
23 0.19% -0.32%
2018-04-
24 0.56% 0.75%
2018-04-
26 -0.11% 0.74%
2018-04-
27 0.66% -0.39%
2018-04-
30 0.47% 0.66%
2018-05-
01 0.47% -0.51%
2018-05-
02 0.60% -9.38%
2018-05-
03 0.82% 1.58%
2018-05-
04 -0.51% -0.55%
2018-05-
07 0.33% -0.98%
2018-05-
08 0.12% -1.30%
2018-05-
09 0.34% -1.23%
2018-05-
10 0.19% -1.87%
2018-05-
11 0.01% -1.08%
2018-05-
14 0.30% 0.81%
2018-05-
15 -0.58% 0.58%
2018-05-
16 0.15% 4.12%
2018-05-
17 -0.18% 0.43%
2018-05-
18 -0.10% 0.47%

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2018-05-
21 -0.01% -1.03%
2018-05-
22 -0.65% 1.24%
2018-05-
23 -0.16% 1.27%
2018-05-
24 0.06% -1.61%
2018-05-
25 -0.05% 0.89%
2018-05-
28 -0.45% 0.30%
2018-05-
29 0.13% -1.57%
2018-05-
30 -0.46% 0.21%
2018-05-
31 0.49% 2.32%
2018-06-
01 -0.32% 0.79%
2018-06-
04 0.57% -3.32%
2018-06-
05 -0.49% 0.26%
2018-06-
06 0.47% 0.64%
2018-06-
07 0.52% -0.81%
2018-06-
08 -0.20% 0.09%
2018-06-
12 0.13% -0.04%
2018-06-
13 -0.52% -1.90%
2018-06-
14 -0.06% -0.70%
2018-06-
15 1.23% -0.48%
2018-06-
18 0.12% 0.79%
2018-06-
19 -0.06% -0.39%
2018-06-
20 1.05% -0.44%
2018-06-
21 0.92% 0.88%
2018-06-
22 -0.17% 1.86%
2018-06- -0.21% -1.08%

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25
2018-06-
26 -0.26% -0.78%
2018-06-
27 -0.03% -0.79%
2018-06-
28 0.24% -0.31%
2018-06-
29 -0.26% -0.58%
2018-07-
02 -0.26% -0.45%
2018-07-
03 0.47% 1.42%
2018-07-
04 -0.46% -1.46%
2018-07-
05 0.46% 0.84%
2018-07-
06 0.83% 0.00%
2018-07-
09 0.17% -0.31%
2018-07-
10 -0.37% 1.10%
2018-07-
11 -0.67% -0.70%
2018-07-
12 0.78% 3.43%
2018-07-
13 0.03% -0.51%
2018-07-
16 -0.40% 1.03%
2018-07-
17 -0.61% -0.47%
2018-07-
18 0.65% 0.98%
2018-07-
19 0.41% 0.59%
2018-07-
20 0.35% -0.38%
2018-07-
23 -0.90% -1.40%
2018-07-
24 0.55% 1.15%
2018-07-
25 -0.21% -0.25%
2018-07-
26 -0.06% 0.93%
2018-07-
27 0.85% 0.75%

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2018-07-
30 -0.36% -0.59%
2018-07-
31 -0.04% 0.04%
2018-08-
01 -0.06% -0.38%
2018-08-
02 -0.54% -4.74%
2018-08-
03 -0.02% 0.35%
2018-08-
06 0.51% -0.13%
2018-08-
07 -0.29% -2.27%
2018-08-
08 0.22% 0.76%
2018-08-
09 0.45% 1.82%
2018-08-
10 -0.26% 2.98%
2018-08-
13 -0.40% -0.38%
2018-08-
14 0.71% 5.61%
2018-08-
15 0.46% 5.66%
2018-08-
16 -0.05% 0.08%
2018-08-
17 0.21% -0.57%
2018-08-
20 0.14% 0.65%
2018-08-
21 -0.81% -0.80%
2018-08-
22 -0.14% 0.00%
2018-08-
23 -0.21% -1.59%
2018-08-
24 -0.04% 0.04%
2018-08-
27 0.36% -0.51%
2018-08-
28 0.51% -0.71%
2018-08-
29 0.67% 1.14%
2018-08-
30 0.05% 1.86%
2018-08- -0.51% 1.30%

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2018-09-
03 -0.18% -2.07%
2018-09-
04 -0.27% 0.04%
2018-09-
05 -0.94% 0.00%
2018-09-
06 -1.13% -2.31%
2018-09-
07 -0.25% -1.11%
2018-09-
10 -0.04% -0.32%
2018-09-
11 0.60% -0.52%
2018-09-
12 -0.06% 0.08%
2018-09-
13 -0.70% -0.44%
2018-09-
14 0.58% 0.61%
2018-09-
17 0.28% 1.32%
2018-09-
18 -0.39% -1.92%
2018-09-
19 0.44% 1.01%
2018-09-
20 -0.32% -0.20%
2018-09-
21 0.45% 0.48%
2018-09-
24 -0.09% -0.28%
2018-09-
25 -0.01% 0.68%
2018-09-
26 0.14% 0.52%
2018-09-
27 -0.13% 0.36%
2018-09-
28 0.42% -0.59%
2018-10-
01 -0.52% -0.76%
2018-10-
02 -0.75% -2.72%
2018-10-
03 0.31% 1.02%
2018-10-
04 0.46% -0.69%

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2018-10-
05 0.11% 0.29%
2018-10-
07 -1.32% -1.32%
2018-10-
08 -1.02% 1.19%
2018-10-
09 0.13% 2.42%
2018-10-
10 -2.80% -1.98%
2018-10-
11 0.22% 0.37%
2018-10-
14 -0.98% -0.53%
2018-10-
15 0.50% 1.94%
2018-10-
16 1.15% 0.44%
2018-10-
17 0.05% -0.60%
2018-10-
18 -0.12% -1.41%
2018-10-
21 -0.61% 0.00%
2018-10-
22 -1.03% -0.08%
2018-10-
23 -0.31% -4.24%
2018-10-
24 -2.86% -2.97%
2018-10-
25 0.00% -1.50%
2018-10-
28 0.94% 0.31%
2018-10-
29 1.27% 2.88%
2018-10-
30 0.43% -1.17%
2018-10-
31 0.21% 0.30%
2018-11-
01 0.17% 0.78%
2018-11-
04 -0.52% 0.21%
2018-11-
05 0.91% 0.34%
2018-11-
06 0.39% 0.85%
2018-11- 0.57% -0.34%

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07
2018-11-
08 -0.08% 1.10%
2018-11-
11 0.27% 1.21%
2018-11-
12 -1.75% -0.75%
2018-11-
13 -1.71% -0.76%
2018-11-
14 0.05% 1.05%
2018-11-
15 -0.04% -1.35%
2018-11-
18 -0.63% -1.62%
2018-11-
19 -0.47% -2.97%
2018-11-
20 -0.65% -0.36%
2018-11-
21 0.84% 3.28%
2018-11-
22 0.40% 0.64%
2018-11-
25 -0.76% 0.89%
2018-11-
26 0.92% -0.21%
2018-11-
27 -0.05% -1.67%
2018-11-
28 0.61% 0.99%
2018-11-
29 -1.49% -0.90%
2018-12-
02 1.84% 0.99%
2018-12-
03 -1.01% -2.33%
2018-12-
04 -0.84% -1.06%
2018-12-
05 -0.22% -0.13%
2018-12-
06 0.37% 1.45%
2018-12-
09 -2.29% -3.33%
2018-12-
10 0.42% -1.68%
2018-12-
11 1.34% 3.56%

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2018-12-
12 0.14% 0.71%
2018-12-
13 -0.99% -2.00%
2018-12-
16 0.95% 1.82%
2018-12-
17 -1.25% -3.40%
2018-12-
18 -0.21% 0.68%
2018-12-
19 -1.37% 1.66%
2018-12-
20 -0.71% -2.30%
2018-12-
23 0.47% -0.73%
2018-12-
26 1.83% 1.59%
2018-12-
27 0.95% 0.45%
2018-12-
30 -0.12% -0.50%
2019-01-
01 -1.48% -2.47%
2019-01-
02 1.22% -4.35%
2019-01-
03 -0.31% -1.27%
2019-01-
06 1.18% 3.09%
2019-01-
07 0.67% 1.65%
2019-01-
08 0.95% -2.03%
2019-01-
09 0.27% 0.29%
2019-01-
10 -0.33% 2.53%
2019-01-
13 -0.03% -1.49%
2019-01-
14 0.66% -0.85%
2. Computing Expected return:
Particulars Market Jbhifi

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Expected return,
𝐸𝐸(𝑅𝑅), -0.02% -0.06%
3. Computing the standard deviation:
Particulars Market Jbhifi
Standard
deviation 0.70% 1.74%
4. Computing the (daily) return correlation coefficient:
Correlation 0.36
5. Commenting on the correlation coefficient between JBHIFI and Market:
The overall correlation coefficient between both the company and the market is
relatively low, but is positive. Hence, the price movement of the market toward negative
would result in negative returns from JB Hi-Fi. This is the main reason behind the negative
expected return of both market and JB Hi-Fi.
6. Calculating beta and detecting the difference between different results:
Particulars Jbhifi
Beta 0.88
The beta calculated from the above table is at the levels of 0.88, which is relatively
not similar to risk that was derived from the website. The major difference between the beta
levels of the organization is due to the estimation while conducting the calculation. The
above beta is relatively calculated on the basis of two year returns provided by JB hi fi. On
the other hand the calculations used by the website are relatively different, which relatively

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alters the overall beta values. The beta level of JB Hi-Fi calculates utilization formula of
covariance between market and company, while dividing it with the variance of the market.
However, the estimated calculation in the website can be different, which is the main reason
behind the discrepancy between the beta values for the same company.
7. Computing the required rate of return using CAPM:
Particulars Value
Rf 2.14%
Market risk premium 5.01%
Beta 0.88
Required rate of return 6.56%
The above table provides information about the overall required rate of return in
accordance with the Capital Asset pricing model. The expected return is estimated to be at the
levels of 6.56%, while the computed expected returns in the above calculation was relatively
at the levels of -0.06%. The discrepancy between the expected returns of the company is due
to the assumptions that is been made under both the circumstances. The computed expected
returns in the above calculations for selectively derived five averaging the overall returns for
the period of the calculation. The average returns directly depict the expected return that
could be achieved by the company in future (Michaelides and Zhang 2017). However, the
formula of Capital Asset pricing Model directly utilizes different values for deriving the
expected return or the required return for an organization. The Capital Asset pricing model
directly utilizes the formula of their risk free rate, market risk premium, and beta of the
companies used for detecting the expected return of the investors who are willing to invest in
a risky stock. Therefore, the expected returns calculated in the above table are the relevant
Expectations of the investors for the investments conducted in the company.

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8. Computing the expected return and standard deviation of your portfolio:
Particulars Value
Portfolio Expected return -0.04%
Portfolio standard
deviation 1.05%
The above table provides information about the portfolio expected returns and
Portfolio standard deviation, which directly helps in diversifying risk involved in investment.
Portfolio expected return standard deviation is derived by utilizing 50% weight on both JB hi-
fi and market.
9. Comparing and explaining the differences between the portfolio risk and return
versus the individual securities risk and return:
Particulars Market Jbhifi
Expected return,
𝐸𝐸(𝑅𝑅), -0.02% -0.06%
Standard deviation 0.70% 1.74%
Correlation 0.36
Beta 0.88
Weight 0.5000 50%
Portfolio Expected return -0.04%
Portfolio standard
deviation 1.05%
The above table provides information about the overall standard deviation and returns
of the single securities and the portfolio. The evaluation can be detected that the expected
Returns of both the individual securities as the relative range -0.02% to -0.06%, expected
returns of the portfolio is at the levels of -0.04%, which indicates adequate diversification has
been conducted to minimize the losses incurred in JB hi fi and market. Then value of the
portfolio standard deviation is considered to be the mediocre value of standard deviations that
has been calculated for each individual stock. The standard deviation of the portfolios is at

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the levels of 1.05%, where it’s the values of single stock ranges from 0.70% to 1.74%. Hence,
it can be identified that the diversification is conducted to minimize the risk involved in
investments and maximize the level of returns from the investments (Gay 2016).
10. Giving an example of spurious correlation and explain why it is called spurious
correlation:
Spurious correlation directly indicates about the two variables that appear to have
Independence Association with each other but actually do not have any kind of correlation.
The correlation is often caused due to the third factor that is not apparently examined during
the time of examination. Spurious relation is a mathematical relationship between the two
events that are not related but require unseen factors which are affecting the correlation
between the two variables. There are major examples of spurious correlation is event that
originated during 1920 skirt length theory, which holds that is skirts and stock market
direction are correlated (Kim 2017). The process directly indicates that is the skirts are long
the stock market is going to fall while if the skirt is short the overall market will go up.
Moreover, the second spurious correlation was detected in late January called Super Bowl
indicator, which suggests that a win by the AFC team would reduce the stock market Returns,
while the win for NFC team would increase the market. The indicator since 1966 has
provided 80% accuracy predicting the returns. However, this kind of evaluation cannot be
used by the financial advisor as investment strategy for the clients.
Reference and Bibliography:
Adam, K., Marcet, A. and Beutel, J., 2017. Stock price booms and expected capital
gains. American Economic Review, 107(8), pp.2352-2408.

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Burns, P. and Dewhurst, J. eds., 2016. Small business and entrepreneurship. Macmillan
International Higher Education.
Fagereng, A., Gottlieb, C. and Guiso, L., 2017. Asset market participation and portfolio
choice over the life‐cycle. The Journal of Finance, 72(2), pp.705-750.
Gay, R.D., 2016. Effect of macroeconomic variables on stock market returns for four
emerging economies: Brazil, Russia, India, and China. The International Business &
Economics Research Journal (Online), 15(3), p.119.
Kim, J.H., 2017. Stock returns and investors' mood: Good day sunshine or spurious
correlation?. International Review of Financial Analysis, 52, pp.94-103.
Mensi, W., Hammoudeh, S. and Kang, S.H., 2015. Precious metals, cereal, oil and stock
market linkages and portfolio risk management: Evidence from Saudi Arabia. Economic
Modelling, 51, pp.340-358.
Michaelides, A. and Zhang, Y., 2017. Stock market mean reversion and portfolio choice over
the life cycle. Journal of Financial and Quantitative Analysis, 52(3), pp.1183-1209.
Zhang, Y., Zhang, Y., Shen, D. and Zhang, W., 2017. Investor sentiment and stock returns:
Evidence from provincial TV audience rating in China. Physica A: Statistical Mechanics and
its Applications, 466, pp.288-294.