Analysis of Historical Records of Five Companies and Market Return

This report analyzes the historical records of five companies and the market return, providing insights on their performance and risk levels. It also discusses the benefits of diversification and the comparison of the portfolio with individual stocks.

Corporate Finance Assignment
Introduction
The report deals with analysis of historical records of five companies mainly AMP Limited,
New Zealand Banking Group Limited, Commonwealth Bank of Australia, National Australia
Bank Limited and Qantas Airways Limited. Further, the return of S& P ASX 200 has been
analysed which is a proxy of market with a beta of 1.
Analysis
In the analysis, the returns of the five companies have been computed using the formula
Returnt = Pt −Pt−1
Pt−1
×100 ,
where Pt is the share price (or the value of ASX200 index) in time period t.
On the basis of said formula, return of the five comparable companies along with the index
has been detailed here-in-below:
Date
S&P/
ASX200
AMP.AX
($A)
ANZ.AX
($A)
CBA.AX
($A)
NAB.AX($A
)
QAN.AX
($A)
Jan-15 5928.80 5.59 28.77 76.01 28.55 2.89
Feb-15 5891.50 5.37 29.83 78.92 29.03 3.12
Mar-15 5790.00 5.48 27.67 75.09 27.69 3.39
Apr-15 5777.20 5.67 27.02 71.90 26.22 3.52
May-15 5459.00 5.13 26.91 71.93 26.20 3.16
Jun-15 5699.20 5.63 27.32 73.99 27.35 3.75
Jul-15 5207.00 5.07 23.34 64.87 24.52 3.36
Aug-15 5021.60 4.73 22.63 63.51 23.58 3.72
Sep-15 5239.40 5.00 22.74 67.02 23.72 3.70
Oct-15 5166.50 5.07 22.69 69.37 23.12 3.41
Nov-15 5295.90 5.08 24.21 74.70 24.60 3.84
Dec-15 5005.50 4.68 20.96 68.71 22.53 3.64
Jan-16 4880.90 4.64 19.41 61.26 20.42 3.62
Feb-16 5082.80 5.05 20.33 67.23 22.15 3.82
Mar-16 5252.20 5.27 21.04 66.30 22.96 3.02
Apr-16 5378.60 5.05 22.08 69.48 22.92 2.89
May-16 5233.40 4.62 21.59 66.73 22.23 2.64
Jun-16 5562.30 5.20 23.13 69.41 23.20 2.96
Jul-16 5433.00 4.71 24.08 64.44 23.90 3.04
Aug-16 5435.90 4.85 24.73 66.92 24.36 2.93
Sep-16 5317.70 4.20 24.93 67.84 24.47 2.93

Date
S&P/
ASX200
AMP.AX
($A)
ANZ.AX
($A)
CBA.AX
($A)
NAB.AX($A
)
QAN.AX
($A)
Oct-16 5440.50 4.32 25.43 72.70 25.29 3.16
Nov-16 5665.80 4.63 28.02 76.17 26.93 3.19
Dec-16 5620.90 4.60 26.98 75.48 27.50 3.27
Jan-17 5712.20 4.49 28.47 76.09 29.01 3.59
Feb-17 5864.90 4.90 29.31 81.29 30.23 3.73
Mar-17 5924.10 5.07 30.18 82.70 30.83 4.14
Apr-17 5724.60 4.77 25.80 75.37 27.31 4.89
May-17 5721.50 4.91 27.17 78.36 27.67 5.58
Jun-17 5720.60 5.10 28.03 79.23 28.00 5.19
Jul-17 5714.50 4.82 27.81 71.72 28.24 5.58
Aug-17 5681.60 4.70 28.00 73.28 29.45 5.69
Sep-17 5909.00 4.84 28.30 75.60 30.54 6.08
Oct-17 5969.90 4.97 26.92 77.35 27.67 5.60
Nov-17 6065.10 5.05 27.92 78.23 28.54 4.98
Dec-17 6037.70 5.11 27.77 76.80 28.12 5.21
Date ASX200
AMP.AX
($A)
ANZ.AX
($A)
CBA.AX
($A)
NAB.AX($A
)
QAN.AX
($A)
Jan-15
Feb-15 -0.63 -3.88 3.68 3.82 1.71 7.96
Mar-
15 -1.72 2.07 -7.23 -4.85 -4.62 8.65
Apr-15 -0.22 3.42 -2.35 -4.25 -5.33 3.83
May-
15 -5.51 -9.61 -0.39 0.05 -0.05 -10.23
Jun-15 4.40 9.80 1.49 2.85 4.38 18.67
Jul-15 -8.64 -9.98 -14.53 -12.32 -10.35 -10.40
Aug-15 -3.56 -6.55 -3.04 -2.09 -3.82 10.71
Sep-15 4.34 5.54 0.48 5.51 0.57 -0.29
Oct-15 -1.39 1.40 -0.22 3.52 -2.52 -7.85
Nov-15 2.50 0.34 6.68 7.68 6.41 12.36
Dec-15 -5.48 -7.89 -13.43 -8.02 -8.41 -5.13
Jan-16 -2.49 -0.93 -7.36 -10.84 -9.36 -0.52
Feb-16 4.14 8.83 4.73 9.74 8.47 5.44
Mar-
16 3.33 4.30 3.45 -1.37 3.62 -20.88
Apr-16 2.41 -4.08 4.99 4.79 -0.15 -4.35
May-
16 -2.70 -8.51 -2.23 -3.95 -3.03 -8.44
Jun-16 6.28 12.60 7.13 4.01 4.36 12.06
Jul-16 -2.32 -9.47 4.10 -7.16 3.01 2.53

Date ASX200
AMP.AX
($A)
ANZ.AX
($A)
CBA.AX
($A)
NAB.AX($A
)
QAN.AX
($A)
Aug-16 0.05 3.04 2.71 3.86 1.94 -3.70
Sep-16 -2.17 -13.45 0.80 1.37 0.47 0.14
Oct-16 2.31 2.84 2.01 7.17 3.32 7.84
Nov-16 4.14 7.23 10.19 4.78 6.49 0.91
Dec-16 -0.79 -0.79 -3.71 -0.91 2.12 2.40
Jan-17 1.62 -2.40 5.50 0.81 5.47 9.97
Feb-17 2.67 9.16 2.98 6.83 4.22 3.73
Mar-
17 1.01 3.47 2.95 1.73 1.98 11.07
Apr-17 -3.37 -5.78 -14.50 -8.87 -11.41 18.16
May-
17 -0.05 2.77 5.28 3.97 1.31 14.17
Jun-17 -0.02 3.85 3.17 1.11 1.22 -6.99
Jul-17 -0.11 -5.38 -0.78 -9.47 0.83 7.52
Aug-17 -0.58 -2.53 0.68 2.17 4.30 1.92
Sep-17 4.00 2.90 1.08 3.16 3.68 6.81
Oct-17 1.03 2.82 -4.88 2.32 -9.40 -7.80
Nov-17 1.59 1.57 3.72 1.15 3.16 -11.11
Dec-17 -0.45 1.16 -0.56 -1.83 -1.49 4.56
Part1
Mean
Return
0.10
4 -0.061 0.074 0.184 0.089 2.107
Answer- A
On perusal of the above, it can be inferred that two stocks shall outperform the market while
rest three shall underperform. Thus, Common Wealth Bank of Australia and Qantas Airways
shall be multi bagger.
Answer- B
The average return of the portfolio shall be the computed by taking average of returns of the
above five stocks. Accordingly, the return of the portfolio has been computed at 0.479 which
is greater than the return on benchmark indices. Thus, the portfolio of the companies shall be
a better option.
Part2
Answer- A
S&P/
ASX200
AMP.AX
($A)
ANZ.AX
($A)
CBA.AX
($A)
NAB.AX($
A)
QAN.AX
($A)

Standard
Deviation 3.252 6.315 5.869 5.578 5.150 9.126
On perusal of the standard deviation of the companies, it can be seen that companies have
monthly standard deviation ranging from 5% to 9% which is quite high. Further, Qantas
Airways have the highest standard deviation among the companies shown. The risk level is
moderate to high among the companies as they are more volatile than S& P index, the
benchmark.
Answer- B
The standard deviation of equally weighted portfolios have been calculated by calculating the
weighted average return of the stocks per day and then computing the variance of the
portfolio in excel and taking square root of the variance to compute standard deviation.
Alternatively, the standard deviation can be computed by using the following formula:
Further, the standard deviation computed is lower than the standard deviation of all the
individual stock. Hence, the diversification helped to reduce the risk of the portfolio. It also
symbolise that securities don’t have a correlation of 1 with each other.
Answer- C
On comparison of standard deviation of market, portfolio and individual stocks it can be
understood that the portfolio is riskier compared to market but less risky compared to
individual stocks. The standard deviation of market has been derived at 3.252.
On the basis of historical records and computed standard deviation it can be concluded that
portfolio is better compared to individual stocks as it less risky and provide better return
compared to market.
Part 3
Answer- A
The Betas of the company has been estimated at 1.158 for portfolio while the beta for the
market is taken as 1. The computed figure has been provided as under:
ASX2
00
AMP.AX
($A)
ANZ.AX
($A)
CBA.AX
($A)
NAB.AX(
$A)
QAN.AX
($A)
Portfolio (equal
weight)
Beta
1.00
0 1.574 1.314 1.235 1.106 0.721 1.158

Answer- B
Beta represents the sensitivity of the stock compared to market. It shows the movement of
stock compared to market. A beta of 1 implies that the market and stock move hand in hand
implying a change of $ 1 in market shall change the share value of 1.
Further, there are different betas of all stock as all stock have different sensitivity to the
market. Accordingly, the betas are high or low based on sensitivity of stock to market.
Part 4
Answer- A
Report to Management of Tri-Star
Executive summary
The report contains an insight on the risk and return characteristics of five companies listed
on Australian Stock Exchange, the equal weighted Portfolio of these stocks and ASX Index.
Further, the report contains an analysis whether the stock are undervalued or overvalued
based on Capital Asset Pricing Model analysis and a final recommendation based on in detail
analysis conducted by relying on historical data.
Assumption and Model used
(a) Model used : Capital Asset Pricing Model considering systematic risk;
(b) ASX 200 is s true representative of market;
(c) Historical data is a true predictor of present;
(d) Fundamental Analysis has not been considered for these companies.
Companies Chosen for Analysis
The following are the Australian entities that have been chosen for analysis:
(a) AMP Limited;
(b) New Zealand Banking Group Limited;
(c) Commonwealth Bank of Australia;
(d) National Australia Bank Limited and
(e) Qantas Airways Limited.
Risk Analysis
Sl. No Name of Company Beta Total Risk
1 AMP Limited 1.574 6.315
2 New Zealand Banking Group
Limited 1.314 5.869
3 Commonwealth Bank of Australia 1.235 5.578
4 National Australia Bank Limited 1.106 5.150
5 Qantas Airways Limited 0.721 9.126
Based on above table, it can be inferred that total risk of Qantas Airways is highest while the
systematic risk of Qantas is lowest. Thus, the majority risk of the stock can be diversifiable
and eliminated. Further, in the present analysis only the systematic risk has been considered.

Return- Risk Analysis- Historical data
Sl. No Name of Company Beta Return (Historical)
1 AMP Limited 1.574 -0,061
2 New Zealand Banking Group
Limited 1.314 0.074
3 Commonwealth Bank of Australia 1.235 0.184
4 National Australia Bank Limited 1.106 0.089
5 Qantas Airways Limited 0.721 2.107
On perusal of the above, it can be inferred that Qantas Airways Limited is the best stock with
lowest systematic risk and highest return. Thus, this stock shall be ideal based on past data.
Return- Risk Analysis- CAPM
Sl. No Name of Company Beta Required Return
1 AMP Limited 1.574 -0.17
2 New Zealand Banking Group
Limited 1.314 0.06
3 Commonwealth Bank of Australia 1.235 0.20
4 National Australia Bank Limited 1.106 0.09
5 Qantas Airways Limited 0.721 1.55
Return- Risk Analysis- Expected Return
Sl. No Name of Company Beta Expected Return
1 AMP Limited 1.574 -5.05
2 New Zealand Banking Group
Limited 1.314 0.87
3 Commonwealth Bank of Australia 1.235 -0.35
4 National Australia Bank Limited 1.106 0.05
5 Qantas Airways Limited 0.721 4.84
Based on above tables, it can be concluded that following stocks are overvalued/ undervalued
Sl. No Name of Company Over/ under Valued
1 AMP Limited Under Valued
2 New Zealand Banking Group
Limited Over Valued
3 Commonwealth Bank of Australia Under Valued
4 National Australia Bank Limited Under Valued
5 Qantas Airways Limited Over Valued

On the basis of above, the recommend company shall be National bank of Australia Limited
even though the return is minimal.
Conclusion
National bank of Australia Limited is recommended based on risk return analysis and CAPM
model.
Answer- B
Yes, I would recommend Tri-Star to invest in equally weighted portfolio of these companies
as it shall generate a higher return with lowest total risk among the five stock and the beta of
1.158 and return of 0.31.