Portfolio Risk and Return Analysis

This assignment focuses on evaluating the risk and return of a portfolio consisting of CBA (Commonwealth Bank of Australia) and Rio Tinto stocks. Students calculate holding period returns, determine betas for each stock, and utilize the Capital Asset Pricing Model (CAPM) to estimate expected returns. The analysis also involves constructing a weighted portfolio based on specified proportions and calculating its overall return and beta. The final stage requires students to compare the portfolio's performance against individual stocks and justify an investment decision.

Running head: ACCOUNTING & FINANCE
Accounting & Finance
Name of the University
Name of the student
Authors note

1ACCOUNTING & FINANCE
Table of Contents
Answer to Question 1:................................................................................................................2
Requirement a:.......................................................................................................................2
Requirement b:.......................................................................................................................2
Requirement c:.......................................................................................................................3
Requirement d:.......................................................................................................................3
Requirement e:.......................................................................................................................3
Answer to Question 2:................................................................................................................4
Requirement 1:.......................................................................................................................4
Requirement 2:.......................................................................................................................5
Answer to Question 3:................................................................................................................6
Requirement i:........................................................................................................................6
Requirement ii:.......................................................................................................................7
Requirement iii:......................................................................................................................8
Requirement iv:......................................................................................................................8
Requirement v:.......................................................................................................................9
Requirement v:.......................................................................................................................9
Requirement vi:....................................................................................................................10
Requirement vii:...................................................................................................................10
Requirement viii:..................................................................................................................10
Reference:................................................................................................................................11

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Answer to Question 1:
Requirement a:
Particulars Amount
Total Fund Desired A $10,000
Periodic Payments B $800
Interest Rate p.a. C 10%
Nos. of Payments p.a. D 2
Compound Interest E=C/D 5.00%
Total nos. of Payments F=NPER(E,B,0,(-A)) 9.95
Nos. of Full Payments G=F-0.95 9
Size of Concluding Payment H=Bx(F-G) $760
Requirement b:
Particulars Amount
Total Value of Lottery A $200,000
Initial Withdraw B $20,000
Investment Value C=A-B $180,000
Rate of Interest p.a. D 10%
Deferred Period (in years) E 4
Future Investment Value
after 4 years F=Cx(1+D)^E $263,538
Monthly Rate of Interest G=D/12 0.83%
Nos. of Monthly Payments H 180
Size of Equal Payments
I=(GxF)/[1-(1+G)^-
H] $2,832

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Requirement c:
Particulars Amount
Annual Deposit A $4,000
Interest Rate p.a. B 5%
Nos. of Deposits C 11
Total Deposit Amount in
2017
D=(1+B)xA[{(1+B)^C
-1}/B] $59,669
Requirement d:
As per the following table, the singer would incur loss if the right would be sold now:
Particulars Amount
Annual Payment A $20,000
Interest Rate p.a. B 6%
Nos. of Deposits C 10
Present Value of the Total
Payments
D=(1+B)xA[{1-
(1+B)^-C}/B] $156,034
Current Sale Price of Future
Rights E $150,000
Loss on Sales F=E-D ($6,034)
Requirement e:
Period
Growth in Annual
Payments
Annual
Annuity
Discoun
t Rate
Discounted
Annuity
A B C D
E=C/
((1+D)^A)
1 0% $1,000 12% $893
2 10% $1,100 12% $877
3 10% $1,210 12% $861

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4 10% $1,331 12% $846
5 10% $1,464 12% $831
6 10% $1,611 12% $816
7 10% $1,772 12% $801
8 10% $1,949 12% $787
9 10% $2,144 12% $773
10 10% $2,358 12% $759
Cost of Annuity $8,244
Answer to Question 2:
Requirement 1:
The shareholder wealth maximization concepts focuses on creating value for business
and is long-term that leads to increase in returns generated. Concept of profit maximization
is considered as short-term approach that indirectly leads to expansion of shareholder’s
wealth. Maximizing the wealth is generated by efficiently allocating the capital and
enhancing the returns.
One of the universally accepted goals of organization is to increase the wealth of
shareholders. Function of net worth in business is measured by the increase in price of shares
that would lead to increased business value. Organization mostly employs the model of
shareholder wealth maximization that helps in obviating the shortcoming of profit
maximization model. It is the obligation of management to take necessary step, which intends
to maximise shareholders wealth. Resources should be allocated in such a way that it leads to
efficient allocation and at the same time helps in mitigating the associated risks (Deguest et
al., 2013).
Requirement 2:
Risk aversing investors are those when faced with two investments decisions, they
would prefer to choose the one with lower level of risks. Assets portfolio of such individual

5ACCOUNTING & FINANCE
would involve assets that would generate fixed income and does not carry any risks. Such
types of investment include treasury bills government bonds, fixed deposits that generate
return that is lower as compared to riskier assets. Risk averse investors faced difficulty in
choosing right investment vehicles (Bae et al., 2014).
However, if the investors choose to make investments in riskier assets, return
generated would be much higher than risk free assets. Such investments are generally for
long-term. There is always trade off between risk and return generated by investments.
Therefore, corporate managers should make the proper allocation of money between risky
assets and risk free assets. Investors investing in riskier assets have the apprehension of
falling market value of their stock price.
Answer to Question 3:
Requirement i:
CBA Rio Tinto All Ordinary Index
Date Stock Price
Holding
Period
Return Stock Price
Holding
Period
Return Stock Price
Holding
Period
Return
1/31/2016 59.99 40.28 4947.90
2/29/2016 66.61 11.04% 42.69 5.98% 5151.80 4.12%
3/31/2016 65.70 -1.37% 51.55 20.75% 5316.00 3.19%
4/30/2016 68.84 4.79% 44.69 -13.31% 5447.80 2.48%
5/31/2016 66.12 -3.95% 45.50 1.81% 5310.40 -2.52%
6/30/2016 68.77 4.01% 49.56 8.92% 5644.00 6.28%
7/31/2016 63.85 -7.16% 47.60 -3.95% 5529.40 -2.03%
8/31/2016 67.17 5.21% 51.61 8.42% 5525.20 -0.08%
9/30/2016 68.09 1.37% 54.18 4.98% 5402.40 -2.22%
10/31/2016 72.97 7.17% 57.75 6.59% 5502.40 1.85%
11/30/2016 76.46 4.78% 59.90 3.72% 5719.10 3.94%
12/31/2016 75.77 -0.91% 66.68 11.32% 5675.00 -0.77%

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2/1/2016
3/1/2016
4/1/2016
5/1/2016
6/1/2016
7/1/2016
8/1/2016
9/1/2016
10/1/2016
11/1/2016
12/1/2016
-20.00%
-15.00%
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
Holding Period Return
CBA
Rio Tinto
All Ordinary Index
Requirement ii:
CBA Rio Tinto All Ordinary Index
Date Stock Price
Holding
Period
Return Stock Price
Holding
Period
Return Stock Price
Holding
Period
Return
1/31/2016 59.99 40.28 4947.90
2/29/2016 66.61 11.04% 42.69 5.98% 5151.80 4.12%
3/31/2016 65.70 -1.37% 51.55 20.75% 5316.00 3.19%
4/30/2016 68.84 4.79% 44.69 -13.31% 5447.80 2.48%
5/31/2016 66.12 -3.95% 45.50 1.81% 5310.40 -2.52%
6/30/2016 68.77 4.01% 49.56 8.92% 5644.00 6.28%
7/31/2016 63.85 -7.16% 47.60 -3.95% 5529.40 -2.03%
8/31/2016 67.17 5.21% 51.61 8.42% 5525.20 -0.08%
9/30/2016 68.09 1.37% 54.18 4.98% 5402.40 -2.22%
10/31/2016 72.97 7.17% 57.75 6.59% 5502.40 1.85%
11/30/2016 76.46 4.78% 59.90 3.72% 5719.10 3.94%
12/31/2016 75.77 -0.91% 66.68 11.32% 5675.00 -0.77%
Average Monthly
Holding Period
Return 2.27% 5.02% 1.29%

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Requirement iii:
CBA Rio Tinto All Ordinary Index
Date Stock Price
Holding
Period
Return Stock Price
Holding
Period
Return Stock Price
Holding
Period
Return
1/31/2016 59.99 40.28 4947.90
2/29/2016 66.61 11.04% 42.69 5.98% 5151.80 4.12%
3/31/2016 65.70 -1.37% 51.55 20.75% 5316.00 3.19%
4/30/2016 68.84 4.79% 44.69 -13.31% 5447.80 2.48%
5/31/2016 66.12 -3.95% 45.50 1.81% 5310.40 -2.52%
6/30/2016 68.77 4.01% 49.56 8.92% 5644.00 6.28%
7/31/2016 63.85 -7.16% 47.60 -3.95% 5529.40 -2.03%
8/31/2016 67.17 5.21% 51.61 8.42% 5525.20 -0.08%
9/30/2016 68.09 1.37% 54.18 4.98% 5402.40 -2.22%
10/31/2016 72.97 7.17% 57.75 6.59% 5502.40 1.85%
11/30/2016 76.46 4.78% 59.90 3.72% 5719.10 3.94%
12/31/2016 75.77 -0.91% 66.68 11.32% 5675.00 -0.77%
Annual Holding
Period Return 1.96% 4.29% 1.15%
Requirement iv:
CBA Rio Tinto All Ordinary Index
Date Stock Price
Holding
Period
Return Stock Price
Holding
Period
Return Stock Price
Holding
Period
Return
1/31/2016 59.99 40.28 4947.90
2/29/2016 66.61 11.04% 42.69 5.98% 5151.80 4.12%
3/31/2016 65.70 -1.37% 51.55 20.75% 5316.00 3.19%
4/30/2016 68.84 4.79% 44.69 -13.31% 5447.80 2.48%
5/31/2016 66.12 -3.95% 45.50 1.81% 5310.40 -2.52%
6/30/2016 68.77 4.01% 49.56 8.92% 5644.00 6.28%
7/31/2016 63.85 -7.16% 47.60 -3.95% 5529.40 -2.03%
8/31/2016 67.17 5.21% 51.61 8.42% 5525.20 -0.08%
9/30/2016 68.09 1.37% 54.18 4.98% 5402.40 -2.22%
10/31/2016 72.97 7.17% 57.75 6.59% 5502.40 1.85%
11/30/2016 76.46 4.78% 59.90 3.72% 5719.10 3.94%
12/31/2016 75.77 -0.91% 66.68 11.32% 5675.00 -0.77%
Standard Deviation 5.26% 8.64% 2.99%

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Requirement v:
0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
0%
1%
2%
3%
4%
5%
Series2 CBA Rio Tinto
Requirement v:
CBA Rio Tinto
Date Stock Price
Holding
Period
Return Stock Price
Holding
Period
Return
Long Term Market
Return 7% 7%
Risk Free Rate 3.25% 3.25%
Beta 1.1 0.95
Expected Returns 7.38% 6.81%

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Requirement vi:
0 0.2 0.4 0.6 0.8 1 1.2
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
Security Market Line
Series2
Linear (Series2)
CBA
Linear (CBA)
Rio Tinto
Linear (Rio Tinto)
Beta
Return Rate
Requirement vii:
CBA Rio Tinto
Date Stock Price
Holding
Period
Return Stock Price
Holding
Period
Return
Beta 1.1 0.95
Expected Returns 7.38% 6.81%
Weightage 60% 40%
Portfolio Return 7.15%
Portfolio Beta 1.04
Requirement viii:
The portfolio would provide higher return than Rio Tinto at a lower risk level than
CBA. Hence, it is better to invest in portfolio.

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Reference:
Bae, G. I., Kim, W. C., & Mulvey, J. M. (2014). Dynamic asset allocation for varied financial
markets under regime switching framework. European Journal of Operational
Research, 234(2), 450-458.
Bodie, Z., Kane, A., & Marcus, A. J. (2014). Investments, 10e. McGraw-Hill Education
DeFusco, R. A., McLeavey, D. W., Anson, M. J., Pinto, J. E., & Runkle, D. E.
(2015). Quantitative investment analysis. John Wiley & Sons
Deguest, R., Martellini, L., & Meucci, A. (2013). Risk parity and beyond-from asset
allocation to risk allocation decisions.
Harlow, W. V., & Brown, K. C. (2016). Market Risk, Mortality Risk, and Sustainable
Retirement Asset Allocation: A Downside Risk Perspective. Journal of Investment
Management, 14(2), 5-32.