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ACC00716 Finance : Assignment

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Added on  2021-06-18

ACC00716 Finance : Assignment

   Added on 2021-06-18

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FINANCEACC00716STUDENT ID:[Pick the date]
ACC00716 Finance : Assignment_1
TASK 3Theoretical BackgroundIn accordance with the portfolio theory, there is an intrinsic relation between risk and returnsince investors are risk averse. As a result, in order to assume higher risk, investors need to beincentivised with higher returns. This understand has also been captured in the followingCapital Asset Pricing Model (CAPM) (Damodaran, 2010).The risk associated with stocks is of two types i.e. systematic and unsystematic. Thesystematic risk refers to the market risk which cannot be eliminated through diversificationand is highlighted by the beta of the stock. On the contrary, unsystematic risk can beeliminated through diversification of portfolio as the assets tend to form a natural hedgeagainst impact of various factors. Also, diversification is most effective when the underlyingreturns of the stocks for the portfolio display a negative correlation (Petty et. al., 2012).Risk Return (Individual Stocks)The company chosen is CSL Limited which is one of the leading companies in the worlddealing with biotherapy and biotechnology. The beta of the company is lower than 1considering that the company is from the pharmaceutical industry which usually is consideredto be defensive and CSL Limited is also adhering to the same (Brealey, Myers and Allen,2012).Through CAPM, the expected return for the CSL stock is estimated below.Also, hypothetical stock has been presented with an estimated beta of -0.25. Considering thatthe beta is negative, it implies that the stock movement would be opposite to the generalmarket movement. Through CAPM, the expected return for the hypothetical stock isestimated below.
ACC00716 Finance : Assignment_2

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