Corporate Finance: Average Returns, Volatility, Beta, Forecast & Investment Strategy

CORPORATE
FINANCE
STUDENT ID:
[Pick the date]

Part 1: Average Returns
a) The average monthly returns for the five companies along with the ASX200 has been
computed in the attached excel and summarized below.
From the above values, it is apparent that barring two stocks namely CBA (Commonwealth Bank
of Australia) and QAN (Qantas) ,all the other companies stock have delivered an inferior average
returns in comparison to the market index i.s. ASX 200.
b) The investor has formed a portfolio which has equal share for all the five companies which
essentially would imply 20% weight for each of the companies stock. The portfolio returns
would be computed using the following approach (Damodaran,2015).
Expected monthly return on the portfolio = 0.2*(-0.061+0.074+0.184+0.089+2.107) = 0.479%
Part 2: Volatility
a) The standard deviation of the monthly returns of the five companies has been obtained
through Excel and summarized as shown below.
The standard deviation tends to highlight the overall risk associated with an underlying stock.
Based on the above values, it is apparent that lowest overall risk is associated with NAB stock
while the highest risk is associated with QAN stock (Berk et. al.,2016).
b) The standard deviation of the monthly returns of the equal weighted portfolio has been
computed as 4.614%. It is noteworthy that this value is lower than the corresponding

standard deviation of all the individual stocks. Hence, owing to diversification, portfolio
tends to have lower risk (Lasher, 2017).
c) The standard deviation of the monthly returns of ASX 200 is 3.252%. Clearly this is lower
than the corresponding standard deviation of all the individual companies and also the
portfolio. However, this is not surprising considering that the index comprises of 200
companies which have the highest market capitalization and also belong to different sectors.
As a result, the diversification of the index is quite high owing to which the returns of the
index do not show high variation as some of the stocks tend to hedge the respective
movements of each other. Also, since the weight of each company share is quite small, hence
the ASX 200 is not vulnerable to extreme movements on back of company sensitive
developments and information (Brealey, Myers and Allen, 2014).
Part 3: Beta
a) Based on the given data and the formula provided, beta has been estimated for each company
which is summarized in the following table.
b) It is evident from the above that lowest beta is possessed by Qantas while highest beta is
possessed by AMP. The reason for the companies having beta in excess of 1 is that the
relative price movement witnessed in these stocks tends to be greater than the ASX 200
index. On the other hand, stocks of companies that tend to move lesser than the index (ASX
200) would have a lower than 1 beta. The stocks with higher than beta of 1 would be referred
to as aggressive stocks unlike those which have a beta lower than 1 and are referred to as
defensive stocks (Petty et. al., 2016).
Part 4: Forecast & Investment Strategy
a) Assessment of Risk