Finance: Answer to Question 1 and 3

This article provides answers to Question 1 and 3 related to finance. It covers topics such as debt amount, investment fund, current annual operating revenue, contemporary portfolio theory, capital asset pricing model, beta value, and risk diversification.

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

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Table of Contents
Answer to Question 1:................................................................................................................2
Requirement a:.......................................................................................................................2
Requirement b:.......................................................................................................................2
Requirement c:.......................................................................................................................2
Requirement d:.......................................................................................................................3
Requirement e:.......................................................................................................................3
Requirement f:........................................................................................................................4
Answer to Question 3:................................................................................................................4
Reference List............................................................................................................................8
Bibliography:..............................................................................................................................8

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Answer to Question 1:
Requirement a:
Particulars Amount
Debt Amount (in million) A $196.70
APR B 5%
Total Period (in years) C 3
Nos. of Compounding Periods
p.a. D 12
Total Nos. of Compounding
Periods E=CxD 36
Investment Fund (in million) F=A/[(1+B/D)^E] $169.35
Requirement b:
Particulars Amount
Current Annual Operating
Revenue (in million) A $4,257.80
Annual Growth Rate B -2.02%
Total Period (in years) C 10
Nos. of Compounding Periods
p.a. D 1
Total Nos. of Compounding
Periods E=CxD 10
Annual Operating Revenue
after 10 years (in million) F=Ax[(1+B/D)^E] $3,471.84
Requirement c:
Particulars Investment A Investment B Investment C
APR A 7.00% 6.95% 6.97%
Nos. of Compounding Periods
p.a. B 2 12 4
EAR C=[(1+A/B)^B]-1 7.12% 7.18% 7.15%

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Requirement d:
Particulars Amount
New Equipment Cost A $7,40,000.00
APR B 4.50%
Total Period (in years) C 20
Nos. of Compounding Periods
p.a. D 12
Total Nos. of Compounding
Periods E=CxD 240
Monthly Installment
F=(AxB/D)/[1-
(1+B/D)^-E] $4,681.61
Requirement e:
Particulars Amount
Face Value A $1,000.00
Coupon Rate B 7.13%
Total Period (in years) C 10
Nos. of Coupon Payments p.a. D 1
Total Nos. of Coupon Payments E=CxD 10
Coupon Payment F=(AxB)/D $71.30
Current Price G $1,240.00
Yield to Maturity
G=RATE(E,F,-
G,A,0) 4.15%

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Requirement f:
Particulars Amount
Face Value A $1,000.00
Coupon Rate B 8.00%
Total Period (in years) C 7
Nos. of Coupon Payments p.a. D 4
Total Nos. of Coupon Payments E=CxD 28
Coupon Payment F=(AxB)/D 20
Required Return p.a. G 4.50%
Required Return per quarter H=G/D 1.13%
Current Bond Price
I=[Fx{1-(1+H)^-
E}/H]+[A/(1+H)^
E] $1,209.17
Answer to Question 3:
The implementation of the contemporary portfolio theory assists in addressing the
concepts of the measures of the explanation of the risks and the returns associated with an
investment. When the time comes to undertake the assessment of the investment and the
finance undertaken by the individual organizations and entities as a whole, one of the most
effective models is the theory of contemporary portfolio (Bollerslev, Li and Todorov 2016).
The arithmetical computation of the risk diversification in investing is addressed in the theory
of the contemporary portfolio. The goal of the theory of portfolio is to choose a portfolio that
would have the maximum probable estimated return with the lowest degree of risk. It might
again take place that the investors may look to lower the risks related with investment at its
minimum degree for certain extent of the estimated return (Bali, Engle and Tang 2016).
Hence, the theory is looked upon as a kind of spreading out the risks related with the financial
assets by discovering the most effective level of diversification policy by making use of the
concepts that are theoretical in nature. As the framework is reliant on the standard deviation
and the anticipated returns of the numerous asset portfolios, the evaluation of the numerous

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portfolios of the provided assets assists in making use of the maximum of the effective
selections. In the aspect of the investors, they look to choose the assets that are not going
together and thereafter the theory helps them in minimizing the extent of risks.
There have been numerous assumptions and fundamentals that form the foundation on
which the theories of contemporary portfolio have been created. There are no costs of
transactions that are associated in the purchasing and the selling of the assets and the
resolving factors for purchasing the securities is known as risk (Bali and Zhou 2016). There
exists unlimited liquidity in the market and the investors can undertake investments of any
kind within the securities. The tax is not looked upon by the investors while undertaking any
decisions related to investment and any kind of capital gains and the dividends does not have
an impact on their mindset regarding investments. During the time of the computation of the
risk, similar ideas are shared by the investors. The purchasers will be keen in purchasing the
securities as it will have an extent of risks that will be equivalent to the returns that is
demanded by the purchaser (Moreira, A. and Muir 2017). However, the sellers will be keen
in selling their securities due to the fact that there would be another kind of security level that
would have an extent of volatility that would be equivalent to the desired returns. In order to
select the most effective level of portfolio from the provided set of the portfolios, it is
essential to make to key decisions in which each of them will be having key benefits related
to the risks and returns (Amaya et al. 2015). The primary decision would be to ascertain an
effective set of portfolio and the next decision would be to select the effective set of the
selected portfolio. Thus, this specific theory addresses the risk diversification by selecting the
asset portfolio that has the highest degree of anticipated returns and vice versa.
Conversely, the relationship among the return and the risk of the portfolio of the
assets is addressed by utilizing the model or the theory of the “capital asset pricing model”.
This specific framework introduces the risk independent rate and the investors have the

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ability to leveraging their portfolio by utilizing the rate that is riskless by purchasing more
shares and thereafter short selling the risk independent rate in the market. With the help of
making investments in the rates that are risk free, the investors have the ability to deleverage
their investments (McLean and Pontiff 2016). The spreading of the unsystematic risks is the
essential reason that is related with the creation of the portfolio of the financial assets.
Nonetheless, because of the presence of the systematic risks, there cannot be overall
rumination of the risk factor. The investors in this scenario find it easy to spread out the risks
related to the stock portfolios as there exists a lower level of correlation among the asset
portfolios.
The alternative risk free rate is estimated in the model to be 2.73%. The value of the
beta of the case organization is 1.17% and the value related to the risk premium of the market
is 6.50%. The amount of the beta of the company that has been selected hypothetically is -
0.25%. It is observed that the anticipated return of the case organization is 10.34% and the
other hand the value of the hypothetical organization 1.11%. Therefore, the stock of the case
organization is creating critically increased returns in comparison to the company that is
hypothetical. The variations that are observed in the portfolio can be minimized in
accordance to the theory by selecting the class of the assets that have negative or lower level
of covariance as the expenses can be minimized by making use of the method of
diversification.
The beta value explains the security is not that volatile in accordance to the market.
The beta value that is seen to be negative of the hypothetical organization explains that the
investments in the stocks of these organizations would lead to movements that would be in
the opposite side of the stock market. Hence, it can be said according to the capital asset
pricing model that the value movement of the portfolio is in line with the value in the market.
The beta value has an extensive role to play in lining up the risk profiles with the

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investments. The investors who do not like to take risks in order to avoid the additional
weight age and volatility of the portfolios look for higher beta value. When the stocks are
assimilated in a portfolio, it is critical to look at the beta value of every stock. The investors
look to ensure that calculation of the beta value is undertaken by recognizing the price
fluctuations that have taken place earlier. Conversely, the security will go the same course
may not be assured. In order to estimate the value expected return of the portfolio, it is
essential to look at the beta value. The stock portfolio of the company that is hypothetical and
the case organization consist of the equivalent segment of the shares. The investors are
capable of diversifying the risks related with the investment as the beta value lowers down to
0.59 for the case company and 1.17% and -0.25 for the hypothetical company. The portfolio
beta value is lowered to 0.46% and overall expected return of the portfolio comes to 5.72%.
Hence, it can be observed that creating the portfolio of the financial assets assists in risk
diversification by lowering the beta value and increasing the estimated returns. Om the other
hand, as both the unsystematic and the systematic risks, diversification of the assets will be
helpful in mitigating the systematic risks in accordance to the unsystematic risks that comes
out due to the external factors that cannot be avoided.

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Reference List
Amaya, D., Christoffersen, P., Jacobs, K. and Vasquez, A., 2015. Does realized skewness
predict the cross-section of equity returns?. Journal of Financial Economics, 118(1), pp.135-
167.
Bali, T.G. and Zhou, H., 2016. Risk, uncertainty, and expected returns. Journal of Financial
and Quantitative Analysis, 51(3), pp.707-735.
Bali, T.G., Engle, R.F. and Tang, Y., 2016. Dynamic conditional beta is alive and well in the
cross section of daily stock returns. Management Science, 63(11), pp.3760-3779.
Bollerslev, T., Li, S.Z. and Todorov, V., 2016. Roughing up beta: Continuous versus
discontinuous betas and the cross section of expected stock returns. Journal of Financial
Economics, 120(3), pp.464-490.
McLean, R.D. and Pontiff, J., 2016. Does academic research destroy stock return
predictability?. The Journal of Finance, 71(1), pp.5-32.
Moreira, A. and Muir, T., 2017. Volatility‐Managed Portfolios. The Journal of
Finance, 72(4), pp.1611-1644.
Bibliography:
Bloomberg.com. (2018). Australian Rates & Bonds. [online] Available at:
https://www.bloomberg.com/markets/rates-bonds/government-bonds/australia
Finance.yahoo.com. (2018). BLD.AX : Summary for BORAL LTD FPO - Yahoo Finance.
[online] Available at: https://finance.yahoo.com/quote/BLD.AX?p=BLD.AX [Accessed 14
Apr. 2018].