Computation of Holding Period Returns and CAPM Equation for WBC and CBA Stocks

The article discusses the computation of Holding Period Returns and CAPM Equation for WBC and CBA Stocks along with the comparison of returns with All Ordinaries Index. It also explains the systematic risk and estimated returns for the portfolio. The article is relevant for students studying finance and accounting.

ACCOUNTING & FINANCE
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Question 4
1) The computation of Holding Period Returns (HPR) for the given two stocks and the
chosen Index is indicated below.
Formula Used (HPR%) = [(Adjusted close – WBC Open Price)/WBC Open Price]*100
Adjusted Close = WBC Close Price + Dividends
Formula Used (HPR%) = [(Adjusted close – CBA Open Price)/WBC Open Price]*100
Adjusted Close = CBA Close Price + Dividends

Formula Used (HPR%) = [(All ordinaries close value- All ordinaries Open value)/ All
ordinaries Open value]*100
The respective line graph to compare thee returns of the two stocks and the index is shown
below.
2) Average monthly HPR% for WBC = (-1.73 + 2.08 + 3.35 -4.61 + 3.26 -1.24 -0.61-
6.99+0.07-2.76 +8.58 +0.00)/12 = -0.60%
Average monthly HPR% for CBA = (-9.47 + 2.31 + 3.16 + 2.32 + 1.15 -1.83 -3.14 -2.72-
0.68-3.51+5.15+2.63)/12 = -0.39%

Average monthly HPR% for All Ordinaries Index = (0.04-0.54+4.03+1.35+1.82-0.34-0.48-
4.06+3.45+0.85+2.71+1.22)/12 = 0.84%
3) Annual Holding Period Returns = [(Closing Price at year end – Opening Price at year
beginning + Dividends paid)/ Opening Price at year beginning] *100
Annual holding period returns for WBC = [(29.30-31.82 + 1.88)/31.82]*100 = -2.01%
Annual holding period returns for CBA = [(74.79-83.73 + 4.3)/83.73]*100 = -5.54%
Annual holding period for All Ordinaries Index = [(6366.2 -5773.9)/5773.9]*100 = 10.26%
4) The standard deviation of monthly HPR of WBC is indicated below.
Standard deviation = (1.82/12)0.5 = 3.90% per month
The standard deviation of monthly HPR of CBA is indicated below.

Standard Deviation = (1.77%/12)0.5 = 3.84% p.a.
The standard deviation of monthly HPR of All Ordinaries Index is indicated below.
Standard Deviation = (0.52/12)0.5 = 2.07% p.a.
5) The requisite scatter plot is indicated below.

6) The CAPM equation states the following (Parrino & Kidwell, 2014).
Required Return = Risk Free Rate + Beta *(Market Returns – Risk Free Rate)
Required Return (WBC) = 2.78% + 1.26(5.85-2.78) = 6.65%
Required Return (CBA) = 2.78% + 1.23 (5.85-2.78) = 6.56%
7) The requisite SML and scatter plot is shown below.

8) Based on the given data, weight of WBC in portfolio is 40% while weight of CBA in
portfolio is 60%.
Estimated Returns (Monthly) = 0.4*(-0.6) + 0.6*(-0.39) = -0.474% per month
Estimated Beta = 0.4*1.26 + 0.6*1.23 = 1.242
9) It is apparent that that systematic risk of both the individual stock and the portfolio tends to
higher than 1 which implies that the individuals stocks along with the portfolio are riskier
than the market. However, based on the past performance of the respective stocks during
2017/2018 financial year, they are expected to yield negative returns and also the portfolio.
As a result, it makes sense to invest in the All Ordinaries Index which would lead to higher
average returns at lower risk (Petty et. al., 2015).

References
Parrino, R. & Kidwell, D. (2014) Fundamentals of Corporate Finance, 3rd ed. London:
Wiley Publications
Petty, J.W., Titman, S., Keown, A., Martin, J.D., Martin, P., Burrow, M. & Nguyen, H. (2015).
Financial Management, Principles and Applications, 6th ed.. NSW: Pearson Education,
French Forest Australia