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Corporate Finance2 1. The average monthly returns for the three companies are as shown in the table below: Table 1: Returns summary statistics WBC ReturnsAMC ReturnsAVEO Returns Average Monthly Returns0.0013520.0036720.03223 Standard Deviation of Returns0.0526370.115170.348554 2. Table 2: Coefficient of variation WBC ReturnsAMC ReturnsAVEO Returns Average Monthly Returns0.0013520.0036720.03223 Standard Deviation of Returns0.0526370.115170.348554 Coefficient of Variation38.9258931.3629610.81456 An investor who is risk-averse should consider assets with a historically degree of volatility that is low but with a degree of returns that is high. Hence, the investor should invest in AVEO which has the lowest degree of variation of 10.81 with the highest degree of returns of 3.22%. On the other hand, a risk-seeking investor should look into assists with a historically degree of volatility that is high. Hence, the investor should choose WBC with the highest volatility at 38.93 and AMC with a volatility of 31.36.
Corporate Finance3 A risk neutral investor should look to invest in assets with a historically medium degree of volatility. Hence, the best place to invest would be in AMC with neutral volatility of 31.36. 3. Table 3: Variance-Covariance Matrix All-Ordinary Index.WBCAMCAVEO All-Ordinary Index.0.001066750.001299730.00141424-0.00021999 WBC0.001299730.002790220.002254360.000938286 AMC0.001414240.002254360.01344544-0.00143314 AVEO-0.000219990.00093829-0.001433140.119150284 From table 3, it is evident that the all ordinary index moves together with WBC and AMC (positive covariance). Moreover, WBC also moves together with AMC and AVEO (positive covariance). However, AVEO has opposite returns with the all-ordinary index and AMC (negative covariance). Based on the correlations, it can be seen that the three stocks and the all-ordinary index slightly move in the same directions (the correlations are greater than 0). 4. Table 4: AVCO & AMC Portfolio Average Returns-0.004818434 Portfolio Standard Deviation0.479739401 Table 5: AVCO & WBC Portfolio Average Returns-0.004001183 Portfolio Standard Deviation0.446295815
Corporate Finance4 Table 6: AMC & WBC Portfolio Average Returns-0.000116048 Portfolio Standard Deviation0.291458365 5. A three-asset portfolio is more complex since it involves obtaining a variance- covariance matrix for computation, unlike the two-asset portfolio which only involves the correlations. Table 7: Three-asset portfolio Portfolio Average Returns-0.002978555 Portfolio Standard Deviation0.414331309 A three-asset portfolio is more efficient than a two-asset portfolio as it minimizes risk while maximizing the returns. 6. Table 8:Systematic risk WBCAMCAVEO Beta0.4658590.105201-0.00184 The betas of WBC and AMC are positive hence the stocks swing with the market movement. However, AVEO has a negative beta hence the stock swings in the positive direction as the market movement.
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Corporate Finance5 Consequently, the beta of WBC is greater than AMC hence implying that AMC poses less risk than WBC but with lower returns. 7. The beta coefficient is used in measuring the systematic risk of investment while the standard deviation is used in measuring the total risk of an investment. Hence, the beta coefficient is the most appropriate measure of risk for a diversified portfolio since it considered the undiversifiable risk.