This article provides insights on finance for managers with solved assignments, essays, and dissertations. It covers topics such as historical returns, average rate of returns, standard deviation, beta, and more. The analysis is done on the basis of Modern Portfolio Theory.
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Running head: FINANCE FOR MANAGERS Finance for Managers Name of the Student: Name of the University: Author Note
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1 FINANCE FOR MANAGERS Table of Contents Answer to Question a:.....................................................................................................................2 Requirement 1:.............................................................................................................................2 Requirement 2:.............................................................................................................................2 Answer to Question b:.....................................................................................................................3 Answer to Question c:.....................................................................................................................3 Answer to Question d:.....................................................................................................................4 Answer to Question e:.....................................................................................................................4 References and Bibliography...........................................................................................................6
2 FINANCE FOR MANAGERS Answer to Question a: Requirement 1: Historical Monthly Returns of Market Index: Date Monthly Closing Index Monthly Returns ZiZ = [zi– z(i– 1)]/ z(i- 1) Sep-1755459.75 Oct-1757712.864.06% Nov-1758813.501.91% Dec-1760007.772.03% Jan-1859809.19-0.33% Feb-1859916.010.18% Requirement 2: Historical Average Rate of Returns & Standard Deviation: DateBoral Ltd.Reference Co.Market IndexBoral Ltd. Reference Co. Market Index XiYiZi(X - Xi)2(Y - Yi)2(Z - Zi)2 Oct-175.61%-8%4.06%0.056%0.672%0.062% Nov-175.18%-2%1.91%0.037%0.048%0.001% Dec-173.59%7%2.03%0.001%0.462%0.002% Jan-182.70%-2%-0.33%0.003%0.048%0.036% Feb-18-0.81%6%0.18%0.165%0.336%0.019% Average Rate of Returns3.252%0.200%1.570% X = ΣXi/nY= ΣYi/nZ=ΣZi/n Standard Deviation2.56%6.26%1.74% σx= √Σ(x-xi)2/(n-1)σy= √Σ(y-yi)2/(n-1)σz= √Σ(z-zi)2/(n-1) The above figure shows the computation of Historical Average rate of return and standard deviation. The company which is selected for this assignment is Bowral Ltd which is to be analyzed on the basis of the reference company and the market index. The average of return of the company selected is higher in comparison to reference company and market trend. The
3 FINANCE FOR MANAGERS average rate of return of the Bowral ltd is shown in the above chart at 3.252. The standard deviation which is shown in the above table for the company 2.56% and that of the market trend andreferencecompany’scalculatedstandarddeviationisshownat6.26%and1.74% respectively. Answer to Question b: DateBoral Ltd.Reference Co. (X - Xi)(Y - Yi) Oct-172.361%8.200% Nov-171.923%2.200% Dec-170.338%6.800% Jan-180.556%2.200% Feb-184.065%5.800% Covariance0.001267189 COV(x,y) =Σ(x-xi)(y- yi)/(n-1) ParticularsBoral Ltd.Reference Co. Weightage50%50% wxwy Average Rate of Return3.252%0.200% rxry Variance0.066%0.392% σ2xσ2y Covariance Portfolio Return Portfolio Standard Deviation 0.001267189 Cov(x,y) 1.726100% R= [(wx x rx)+(wy x ry)] σ = √(wx2x σ2x) + (wy2x σ2y) + [2wx x wy x Cov(w,y)] 4.22%
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4 FINANCE FOR MANAGERS In the above table the computation of the average rate of return and standard deviation are calculated and the average rate of return for the reference company is shown in the above table as 0.200%. The variances which are calculated for the selected company which is Bowral ltd and the reference company are shown in the table given above are 0.066% and 0.392% respectively. The portfolio returns which is given for the company is 1.726100% which represents the return which can be expected or earned by the business. The standard deviation of the portfolio represents the aggregate risks which are associated with the portfolio. As per the calculation the portfolio standard deviation is shown in the above table as 4.22%. Answer to Question c: ParticularsBoral Ltd.Reference Co. BetaA1.15-0.2 Market Risk PremiumB6.60%6.60% Risk Free RateC2.58%2.58% Expected ReturnD=C+(AxB)10.17%1.26% Answer to Question d: ParticularsBoral Ltd.Reference Co. WeightageA50%50% w1w2 BetaB1.15-0.20 Portfolio Betaβ1β2 Portfolio Beta βp=(w1xβ1)+(w2 xβ2) Market Risk PremiumB Risk Free RateC Portfolio Expected ReturnD=C + (βpxB) 0.48 6.60% 2.58% 5.72%
5 FINANCE FOR MANAGERS Answer to Question e: The issue that has been presented in the question is that the risk and return measures that have been calculated have been asked to discuss. The particular trend that can be observed from the set of computations that have been carried out in this particular study refers to the fact that the rate of return and risk rate in a normal situation are effectively high. However, when the particular portfolio has been constructed the percentage of returns decreases optimally but the rate of risk decreases by a rapid rate. Therefore, it can be further be concluded that the construction of a portfolio results in a decreased rate of risk. This can be further evidenced by the modern portfolio theory that puts forward a particular hypothesis based on the idea that the investors that are risk-averse in nature will be able to construct the portfolios for the purpose of maximizing the expected return that has been based on a given level of market risk (Schulmerich, Leporcher and Eu 2015). The modern portfolio theory has been founded on the particular emphasis that the particular component of financial risk is an inherent part of the higher reward. The modern portfolio theory further suggests that it will be possible to create an efficient barrier in regards to the construction of optimal portfolios by facilitating a rate of estimated return that is maximum for a given level of risk. Moreover, it should be noted here that by investing in a multiple stocks an investor could gain the advantages of diversification and reduction in the riskiness of the constructed portfolio (Hawley and Lukomnik 2018). The analysis of the above risks and returns can be done on the basis of the Modern portfoliotheory.Themodernportfoliotheorystatesthatariskaverseinvestorwillbe constructing a portfolio in order to get as much returns from the market as possible considering a given level of market risks. The theory recognizes that the risks which are associated with a
6 FINANCE FOR MANAGERS particular portfolio is closely related with the rewards which can be gained from the portfolio. The theory is closely followed by the investors to decide in which portfolio the investors can invest in order to amplify the returns associated with the portfolio. As per the calculations which is shown in tables above the historical returns are computed for the reference company for the same data is provided in the case study as given in the assignment. The calculations as shown in the table above also show market trends for which calculations of have done for the risk associated and the expected return on the same. The closing stock index are given for the reference company from the month of September 2017 to February 2018. As per the market closing stock index the index has been fluctuating in nature. The monthly closing index shows that it has increased from 55459.75 in September 17 and further shown an increasing trend in the months of October, November, December and then it has decreased in January 2018 which shows an index which was 59809.19. The overall monthly return in terms of percentage of the returns is shown in the month of October is at 4.06% and then the return falls in the next month and it is shown at 1.91%. The monthly returns for the month of December has again increased which is shown at 2.03%. The monthly return of January which is calculated is shown in negative figure which is not favorable for the business. The analysis of the risks and returns are carried out on the basis of comparison of Market trend, Reference company and the selected company which is Bowral ltd. For the purpose of analysis of market stocks, standard deviation and average rate of return is calculated. The average rate of return for Bowral limited is more than the return which is expected from the market trend and reference company. In addition to this the calculation also show the analysis of Beta comparison between the company and the reference company. Beta refers to the measure of volatility of security or portfolio and it represent the systematic risks which are associated with the portfolio
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7 FINANCE FOR MANAGERS or security. In case of a security where the beta needs to be calculated than the covariances of the security’s returns in order so that the measure of beta is effectively done. The beta of the company responds to the various market swings. The use of beta is quite useful in the capital asset pricing model which is used in the calculation of expected return of an asset based on the beta of the asset and also the expected market returns. The beta of the portfolio which is shown in the above calculation in case of Bowral ltd show an estimate of 1.15 and the beta of the portfolio of the reference company is shown in the table at -0.20. The market risk free rate of return which is shown in the calculation of expected portfolio return shows that the estimate is 6.60% and the risk-free rate of return as shown is of 2.58%. The expected return from the portfolio which is calculated shows an estimate of 5.72%. The beta of the portfolio is calculated to be 0.48 which is lower than the 1 which signifies that the security or the portfolio is less volatile in comparison with the market. In case the beta is more than 1 than the security or the portfolio is considered to be volatile in comparison to the market. Similarly, if the beta estimate is equal to 1 then it signifies that the stock or the portfolio moves with the market. Most of the companies balances the portfolio of the company in such a way that the risk of the portfolio is minimum and the return which is associated with the portfolio is more. In the above case as well, the return of the portfolio is comparatively more and the risks which are associated with the portfolio is relatively less as the beta of the portfolio is less than one. The analysis of the expected return which the company can generate from the portfolio and the calculation of the same depends on the Beta, market risk premium and risk-free rate of return.
8 FINANCE FOR MANAGERS References and Bibliography Chen, J.M., 2016. Postmodern Portfolio Theory. InPostmodern Portfolio Theory(pp. 27-38). Palgrave Macmillan, New York. Hawley, J. and Lukomnik, J., 2018. The Long and Short of It: Are We Asking the Right Questions? Modern Portfolio Theory and Time Horizons.Seattle University Law Review,41(2), p.449. Hua, S., Liang, J., Zeng, G., Xu, M., Zhang, C., Yuan, Y., Li, X., Li, P., Liu, J. and Huang, L., 2015.HowtomanagefuturegroundwaterresourceofChinaunderclimatechangeand urbanization: An optimal stage investment design from modern portfolio theory.Water research, 85, pp.31-37. Rutterford, J. and Sotiropoulos, D.P., 2016. Financial diversification before modern portfolio theory: UK financial advice documents in the late nineteenth and the beginning of the twentieth century.The European Journal of the History of Economic Thought,23(6), pp.919-945. Schulmerich, M., Leporcher, Y.M. and Eu, C.H., 2015. Modern portfolio theory and its problems. InApplied Asset and Risk Management(pp. 101-173). Springer, Berlin, Heidelberg. Way, R., Lafond, F., Farmer, J.D., Lillo, F. and Panchenko, V., 2017. Wright meets Markowitz: How standard portfolio theory changes when assets are technologies following experience curves.