Risk Return Relationship Analysis in JB HiFi

The assignment evaluates the risk return relationship of JB HiFi over a six-month period. The analysis indicates that JB HiFi has a relatively high beta, suggesting that its stock price is highly correlated with market returns. This means that investors can use JB HiFi to reduce risk and improve return generation capacity in their portfolios. However, during economic crises, the risk identification of all stocks may lose friction, leading to losses in value.

Running head: FINANCE
Finance
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
Task for Case Study 1:...............................................................................................................2
a.1) Historical monthly rates of return for the market index:....................................................2
a.2.i) Historical average rate of return and standard deviation of returns for JB HiFi (JBH):...2
a.2.ii) Historical average rate of return and standard deviation of returns for reference
company:....................................................................................................................................3
a.2.iii) Historical average rate of return and standard deviation of returns for the market
index:..........................................................................................................................................3
b) Calculating portfolio historical average rate of return and standard deviation:....................4
c) Calculating CAPM for JB HiFi (JBH) and reference company:...........................................4
d) Calculating Expected portfolio return and Beta:...................................................................5
e) Discussing the risk and return measure of JB HiFi (JBH):....................................................6
Reference and Bibliography:......................................................................................................8

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Task for Case Study 1:
a.1) Historical monthly rates of return for the market index:
Date All Ords Accumulated Return
Sep,2017 55,459.75
Oct,2017 57,712.86 4.063%
Nov,2017 58,813.50 1.907%
Dec,2017 60,007.77 2.031%
Jan,2018 59,809.19 -0.331%
Feb,2018 59,916.01 0.179%
a.2.i) Historical average rate of return and standard deviation of returns for JB HiFi
(JBH):
Date JB HiFi (JBH)
Sep,2017
Oct,2017 -0.087%
Nov,2017 3.100%
Dec,2017 5.633%
Jan,2018 17.201%
Feb,2018 -8.279%
Average returns 3.514%
Standard deviation 9.27%

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a.2.ii) Historical average rate of return and standard deviation of returns for reference
company:
Date Reference Company
Sep,2017
Oct,2017 -8.000%
Nov,2017 -2.000%
Dec,2017 7.000%
Jan,2018 -2.000%
Feb,2018 6.000%
Average returns 0.200%
Standard deviation 6.26%
a.2.iii) Historical average rate of return and standard deviation of returns for the
market index:
Date All Ords Accumulated
Sep,2017
Oct,2017 4.063%
Nov,2017 1.907%
Dec,2017 2.031%
Jan,2018 -0.331%
Feb,2018 0.179%
Average returns 1.570%
Standard deviation 1.74%

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b) Calculating portfolio historical average rate of return and standard deviation:
Date JB HiFi
(JBH)
Reference
Company
Portfolio Portfolio
Sep,2017
Oct,2017 -0.087% -8.000% (50% * -0.087%) + (50% * -8%) -4.044%
Nov,2017 3.100% -2.000% (50% * 3.1%) + (50% * -2%) 0.550%
Dec,2017 5.633% 7.000% (50% * 5.633%) + (50% * 7%) 6.317%
Jan,2018 17.201% -2.000% (50% * 17.201%) + (50% * -2%) 7.601%
Feb,2018 -8.279% 6.000% (50% * -8.279%) + (50% * 6%) -1.140%
Average returns 1.857%
Standard deviation 4.96%
The above table relatively calculate the portfolio value by combining returns provided
by JB hi fi and reference company. The overall average returns of the company for the period
of October 2017 to February 2018 is at the levels of 1.857%. moreover, the standard
deviation of the created portfolio is mainly at the levels of 4.96%. Therefore, from the table
the relevant returns and risk of the portfolio is detected, which could provide investors with
in-depth knowledge to conduct relevant investment decisions. In this context, McLean and
Pontiff (2016) stated that investors with the help of risk evaluation can create a Portfolio with
low risk and high return.
c) Calculating CAPM for JB HiFi (JBH) and reference company:
Particulars Value
Risk Free rate 2.81%
Market Premium 6.60%

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Beta 0.84
CAPM JB HiFi (JBH) Rf + Beta * (Rm – Rf)
CAPM JB HiFi (JBH) 2.81% + 0.84 * (6.6% - 2.81%)
CAPM JB HiFi (JBH) 5.99%
The above table indicates the overall beta and CAPM return of JB HiFi, which is
relatively high due to beta of the company. This relatively indicates that returns from the
company is expected to increase over time.
Particulars Value
Risk Free rate 2.70%
Market Premium 6.60%
Beta -0.20
CAPM Reference Company Rf + Beta * (Rm – Rf)
CAPM Reference Company 2.70% + -0.20 * (6.6% - 2.7%)
CAPM Reference Company 1.92%
The above table indicates the overall beta and CAPM return of JB HiFi, which is
relatively negative due to inverse beta of the company. This relatively indicates that returns
from the company is expected to deteriorate.
d) Calculating Expected portfolio return and Beta:
Particulars Value
Weight 50%

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Weight 50%
Reference Company 1.92%
Reference Company Beta -0.20
JB HiFi (JBH) 5.99%
JB HiFi (JBH) Beta 0.84
Portfolio beta (50% * -0.20) + (50% * 0.84)
Portfolio beta 0.32
Portfolio return (50% * 1.92%) + (50% * 5.99%)
Portfolio return 4.02%
The above table depicts the portfolio beta and return, which comprises 50% weight of
Reference Company and 50% weight of JB HiFi. Furthermore, the portfolio beta is calculated
to be at the levels of 0.32, while the portfolio return is at 4.02%. However, from the
evaluation it could be indicated that the portfolio is highly correlated with market, which is
driving the overall portfolio returns to positive. Therefore, relevant adjustments to the
portfolio needs to be conducted by the investor for increasing the return and reducing the risk
from investment (Agarwal, Ruenzi and Weigert 2017).
e) Discussing the risk and return measure of JB HiFi (JBH):
From the evaluation of JB HiFi return from October 2017 to February 2018 relevant
risk and expected return of the company can be identified. This relatively indicates that
expected return of the company is a relatively high due to the overall rising beta.
Furthermore, the derivation of calculation indicates that returns provided by JB Hi-Fi is
relatively correlated, as beta is less than 1 for the company. Therefore, the risk measure of the
company is relatively high, as beta of the company is at the levels of 0.84, which depicts the

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high risk from investment, as it is close to 1. The beta is relatively calculated from the returns
provided by the company and market, which helps in identifying the risk involved in
investment. The overall returns of JB HiFi is detected from the calculation of CAPM, which
evaluates risk free rate, market return, and beta of the company. This evaluation mainly stated
a total return of 5.99%, which is provided by JB HiFi. This positive relationship between JB
HiFi returns and market returns can be used by investors to increase their portfolio returns
against adverse market volatility. In this context, Zhang, Liu and Xu (2014) mentioned that
use of expected return and risk allows investors to formulate portfolios, which are risk averse
and could provide higher returns from investment.
The overall risk attributes of JB HiFi is detected from the valuation of six months,
which is relatively short duration for identifying the actual attribute of the stock. The
increment in months need to be conducted for the calculation of beta and returns. The
calculations indicate that during short period beat of the company is relatively high, which is
indicating a high return, as depicted by CAPM. The high correlation between the market
return and JB HiFi return indicates that any increment in capital market would raise share
price of the company. Furthermore, JB HiFi can be used in portfolio to reduce its risk and
improve return generation capacity of the investors. On the other hand, Bollerslev, Todorov
and Xu (2015) argued that risk identification loses its friction if economic crisis is in motion,
where all the stocks lose their value due to highly volatile capital market.

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Reference and Bibliography:
Agarwal, V., Ruenzi, S. and Weigert, F., 2017. Tail risk in hedge funds: A unique view from
portfolio holdings. Journal of Financial Economics, 125(3), pp.610-636.
Aliu, F., Pavelková, D. and Dehning, B., 2017. Portfolio risk-return analysis: The case of the
automotive industry in the Czech Republic.
Beshears, J., Choi, J.J., Laibson, D. and Madrian, B.C., 2016. Does Aggregated Returns
Disclosure Increase Portfolio Risk Taking?. The review of financial studies, 30(6), pp.1971-
2005.
Bollerslev, T., Todorov, V. and Xu, L., 2015. Tail risk premia and return
predictability. Journal of Financial Economics, 118(1), pp.113-134.
Bruni, R., Cesarone, F., Scozzari, A. and Tardella, F., 2015. A linear risk-return model for
enhanced indexation in portfolio optimization. OR spectrum, 37(3), pp.735-759.
Hoffmann, A.O. and Post, T., 2015. How return and risk experiences shape investor beliefs
and preferences. Accounting & Finance.
Hung, K., Yang, C.W., Zhao, Y. and Lee, K.H., 2018. Risk Return Relationship in the
Portfolio Selection Models. Theoretical Economics Letters, 8(03), p.358.
McLean, R.D. and Pontiff, J., 2016. Does academic research destroy stock return
predictability?. The Journal of Finance, 71(1), pp.5-32.
Nguyen, T.T., Gordon-Brown, L., Khosravi, A., Creighton, D. and Nahavandi, S., 2015.
Fuzzy portfolio allocation models through a new risk measure and fuzzy sharpe ratio. IEEE
Transactions on Fuzzy Systems, 23(3), pp.656-676.