Calculation of Historical Monthly Rate of Return and Average Return

Case Study 1

Contents
Part A: Calculation of historical monthly rate of return, historical average rate of return and
standard deviation............................................................................................................................3
A.1: Historical monthly rate of return of market index...............................................................3
Part A.2: Historical average return and standard deviation.........................................................3
Part B: Expected Return and portfolio beta.....................................................................................5
B.1: Expected return of Boral Limited and Reference Company................................................5
Part B.2: Portfolio Beta and Expected Return.............................................................................6
Part C: Discussion on risk and return for the case company, Reference Company and portfolio...7
Use of CAPM to explain the risk and return relationship............................................................7
Impact of systematic risk and unsystematic risk on the return of Boral Limited........................8
References........................................................................................................................................9

Part A: Calculation of historical monthly rate of return, historical average rate of return
and standard deviation
A.1: Historical monthly rate of return of market index
Formula to calculate the monthly rate of return=
(Share price of current month-Share price of previous month)/Share price of previous month
Monthly rate of return refers to the holding period return received when investment has
been made in particular stock for defined one month period. Generally monthly return is
calculated to calculate the average monthly return and other risk measures such as standard
deviation, beta and variance (Brigham and Michael, 2013).
Given Data
Month Boral (BLD) Reference Company All Ords Total Returns
Monthly returns Monthly returns Month Closing Index
Oct-18 59483.09
Nov-18 -9.09% 14.00% 58149.20
Dec-18 -3.14% 8.00% 57887.91
Jan-19 0.20% 1.00% 60199.50
Feb-19 0.61% -2.00% 63843.82
Mar-19 -5.22% 3.00% 64292.24
Calculation of Historical monthly rate of return of market index
Month Boral (BLD) Reference Company All Ords Total Returns
Monthly returns Monthly returns Month Closing Index
Oct-18
Nov-18 -9.09% 14.00% -2.24%
Dec-18 -3.14% 8.00% -0.45%
Jan-19 0.20% 1.00% 3.99%
Feb-19 0.61% -2.00% 6.05%
Mar-19 -5.22% 3.00% 0.70%

Part A.2: Historical average return and standard deviation
In this section there is need to calculate the historical average returns and standard
deviation of returns of Boral Limited, Reference Company, market index, and portfolio. Portfolio
is comprised of equal weight of Boral Limited Shares and Reference Company. So it is important
to find out the monthly returns of portfolio through use of following formula:
Monthly returns of portfolio: Weight of Stock A*Monthly return of Stock A + Weight of Stock
B*Monthly return of Stock B (Damodaran, 2011)
Calculation on monthly returns of portfolio
Mont
h Boral (BLD) Reference Company Portfolio
Monthly returns Monthly returns
50% Boral +
50%
Reference
Company
Oct-18
Nov-
18 -9.09% 14.00% 2.46%
Dec-
18 -3.14% 8.00% 2.43%
Jan-19 0.20% 1.00% 0.60%
Feb-19 0.61% -2.00% -0.70%
Mar-
19 -5.22% 3.00% -1.11%
Historical average rate of return: Historical average return refers to the mean return of total
monthly returns for the particular period. It provides overall return will be earned by an investor
if investment has been made for 1 year with monthly lay over.
Formula: (Sum of all monthly return divided by number of months) (Moles and Kidwekk, 2011)
In this case we will make calculation through use of excel formula “Average”