Risk Analysis in Finance

0Running head: FINANCE
SOUTHERN CROSS UNIVERSITY
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1FINANCE
Part B: Risk Analysis
Introduction
Risk Assessment of a company can be well defined in terms of investment. Every
financial asset investment is associated with some or the other form of risk it can be either
financial risk or business risk. Beta is an important factor in terms of the risk associated with an
investment. The beta of the stock shows the sensitivity of a stock with respond to a stock and the
same is accounted for assessing the movement of the stock with respect to a benchmark index.
The beta of the Cochlear Ltd Company was assessed thereby analyzing the financial risk
associated with the project (Fabrizio 2017).
Discussion
Risk and Return Estimates
Required Rate of Return
The risk and return estimates was done for determining the required rate of return for the
stock via the Capital Asset Pricing Model and the same can be well estimated by taking the key
factors like the prevailing risk free rate in the economy, the return generated by the market index
and the beta of the stock. The risk free rate for the stock was taken at 1.95%, the return generated
on the market index was taken at 3.29% and the beta of the stock was derived by regressing the
returns of the stock over the benchmark index. The required rate of return was evaluated to be
around 3.27% for the stock and the same was much closer to the return generated by the market
index due to the positively correlated beta of the stock. On, the other hand side, negative beta

2FINANCE
taken for the hypothetical company at -0.2 times generated a return of around 1.68% reflecting
the required rate of return by the investors for the return generated by this stock.
Cochlear Ltd Hypothetical Company
Capital Asset Pricing Model Capital Asset Pricing Model
Beta
0.986157
6 Beta -0.2
Risk Free Rate 1.95% Risk Free Rate
1.95
%
Return on Market 3.29% Return on Market
3.29
%
Required Rate of
Return 3.27% Required Rate of Return
1.68
%
Portfolio Measures
It is essential to enjoy the benefit of diversification and that can be well managed by
investors with the help of building an efficient portfolio giving appropriate weights to stocks.
Each of the constituent the COC Ltd stock and the hypothetical stock were given a weightage of
around 50% equally. On a combined portfolio basis the required rate of return would be around
2.47% and the combined beta of the portfolio would be around 0.39 times.
Portfolio Weights
Cochlear 50%
Hypothetical 50%
Portfolio
Returns
(%)
Cochlear 1.63%
Hypothetical 0.84%
Total 2.47%
Particulars Beta
Portfolio
0.393078
8