Financial Modeling and Investment Decisions: An ASX200 Market Analysis

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Corporate Finance
1

Table of Contents
Introduction.................................................................................................................................................3
Part 1...........................................................................................................................................................4
(a)............................................................................................................................................................4
(b)............................................................................................................................................................4
Part 2...........................................................................................................................................................5
(a)............................................................................................................................................................5
(b)............................................................................................................................................................5
(c)............................................................................................................................................................5
Part 3...........................................................................................................................................................7
(a)............................................................................................................................................................7
(b)............................................................................................................................................................7
Part 4...........................................................................................................................................................8
(a)............................................................................................................................................................8
(b)..........................................................................................................................................................10
Conclusion.................................................................................................................................................11
Reference...................................................................................................................................................12
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Introduction
In this study, Tri-star management needs to understand the concepts of portfolio management so
that they are able to invest their money in the market with minimum risk and high return.
Further, in this study, various financial concepts are used to analyze the financial data of five
companies and also for overall return from ASX200 market which enables the company to
compare and take corrective investment decision for better growth in the market.
3

Part 1
(a)
Calculation of Average Rate of Return for the Share of Five companies Listed in ASX.
Particular ASX2
00
AMP.AX
($A)
ANZ.AX
($A)
CBA.AX
($A)
NAB.AX($
A)
QAN.AX
($A)
Average
Return
0.104 -0.061 0.074 0.184 0.089 2.107
As the ASX 200 Had a return rate of 10.4 % which a generate return from the share in the market
from investment (Chandra, 2017). QAN is the company which earns a high return from their
investment and also a major impact on the financial performance of other companies in the
market.
(b)
Stock Name Average Return Probability R = A*P
AMP.AX ($A) (0.06) 0.20 (0.01)
ANZ.AX ($A) 0.07 0.20 0.01
CBA.AX ($A) 0.18 0.20 0.04
NAB.AX($A) 0.09 0.20 0.02
QAN.AX ($A) 2.11 0.20 0.42
Expected Return 0.48
As the investor wants to invest their money in the market with a portfolio in which each of the
shares of the company is equally contributed (Wallstreetmojo, 2019). The investor wants to
know about the expected earnings from the portfolio which demonstrated them to invest in the
portfolio for achieved better growth in the market. Here portfolio provides an expected return of
0.48 from the investment which is high in the market.
4

Part 2
(a)
Stock Name Standard Deviation
AMP.AX ($A) 6.32
ANZ.AX ($A) 5.87
CBA.AX ($A) 5.58
NAB.AX($A) 5.15
QAN.AX ($A) 9.126
Here standard deviation of the share of five company is calculated which identified that the
company had a major difference from the means of the population (Hu, & Jacobs, 2017).
Standard deviation identified the degree of deviation from the average of the population. In this
case, QAN had the maximum standard variance from their average monthly return which means
the average return of the company is manipulated and affected by a various factor in the market.
(b)
Stock Name Average Return Probability R = A*P R* - R P(R*-R)
AMP.AX ($A) (0.06) 0.20 (0.01) 0.54 0.11
ANZ.AX ($A) 0.07 0.20 0.01 0.40 0.08
CBA.AX ($A) 0.18 0.20 0.04 0.29 0.06
NAB.AX($A) 0.09 0.20 0.02 0.39 0.08
QAN.AX ($A) 2.11 0.20 0.42 (1.63) (0.33)
Expected Return 0.48 -
The investor wants to construct a portfolio which helps them to achieve their targets in the
market. So they equally divided the share of security in the portfolio so that they can achieve a
maximum profit on minimum risk. For portfolio Standard deviation identified as Zero.
(c)
The overall standard deviation of the market ASX 200 is 3.25 which is adjustable according to
the market forces. A compare to individual share each of share had a high standard deviation for
the share in the market from ASX 200 standard deviation. When it comes to a portfolio it became
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higher as compared to the portfolio which means portfolio had a low level of deviation from the
expected return in the market.
6

Part 3
(a)
Beta is the factor of risk which is calculated from the following formula
β X =Covariance ( Return of Company X , Return of ASX 200)
Variance(return of ASX 200) .
¿ covariance ( Returnof company X , Return of ASX 200)
Particular
ASX2
00
AMP.AX
($A)
ANZ.AX
($A)
CBA.AX
($A)
NAB.AX(
$A)
QAN.AX
($A)
Average
Return 0.104 -0.061 0.074 0.184 0.089 2.107
Variance 10.578 39.882 34.443 31.113 26.524 83.286
Standard
Deviation 3.252 6.315 5.869 5.578 5.150 9.126
Covariance 16.175 16.627 23.698 19.980 8.450 7.412
Beta 1.529 0.417 0.688 0.642 0.319 0.089
(b)
Beta is the indicator of systematic risk associated with a portfolio in the market. This kind of risk
can be avoided by the investor during the investment of their fund in the market. As the industry
had the beta Factor of 1.529 and all the options for investment had risk associated with share and
security is lower than the beta factor of the industry (Alp, & Bilir, 2015). All the five company
had lower beta from the average beta of the market which identified that investment option Is
pretty much secure as compare to market average risk for an investment decision.
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Part 4
(a)
Introduction
Tri-star is the company which wants to invest their money in the security market for the
perspective of wealth maximization. Management conducted a study to forecast the sale price of
a share in the market and also evaluate share according to their investment decision objectives.
Assessment of Risk of each company
Particular
ASX20
0
AMP.AX
($A)
ANZ.AX
($A)
CBA.AX
($A)
NAB.AX(
$A)
QAN.AX
($A)
Expected return
(monthly) 0.00524 -0.05051 0.00872 -0.00354 0.00049 0.04841
Required return 0.13 -0.02 0.01 0.00 0.00 0.00
As the expected rate of return from the share in Jun-2018 is listed above in the table this
indicates the value of the share and required return which an investor demand from the share in
near future so that they can achieve their wealth maximization option from the share of the
company (Habibi et. Al, 2016). Through this study, it is identified that all the share are not
performing according to the market and had a low return in the market so the company needs to
be concern about the performance of the share in the market.
An Evaluation of the share
In the market expected return is 0.005 and required rate of return is 0.13 which is average on the
table which means the price of the share in the market is comparatively low for the products. The
company needs to evaluated each of the shares in which they want to invest and a majorly
incorrect scenario where the market price is low investor can find the share on the low price
(Corporatefinanceinstitute, 2019). So from this study, it is identified that share are low prices in
nature and also the cost of capital for the share is lower than the market cost of capital which is
0.13 for share industry.
Recommendations
8

The investor needs to hold their money and wait for the positive growth in any of the company
so that they can invest their money and earn high revenue from investing activities. If the
investor wants to invest their money then they can invest in the share of ANZ so that they can
earn some of the margins as the expected rate of return for the share is 0.00872 and also required
rate is 0.01. So an investor needs to hold their money in the current scenario so that they can
identify the major changes and invest their money to earn a high margin from the share of Five
companies.
Conclusion
In this study share market is evaluated on future pricing of the share so can investor enable to
understand the trend of the market and also able to take the major decision of investing of their
money in the market. Further Share is evaluated for the month of June in 2018 so that investor
can able to understand the market flow and adopt the right strategy to invest their money for
wealth maximization.
9

(b)
Future share forecasting
Stock Name Average Return Probability R = A*P R* - R P(R*-R)
AMP.AX ($A) (0.050514) 0.20 (0.010103) 0.05 0.01
ANZ.AX ($A) 0.008716 0.20 0.001743 0.47 0.09
CBA.AX ($A) (0.003543) 0.20 (0.000709) 0.48 0.10
NAB.AX($A) 0.000487 0.20 0.000097 0.48 0.10
QAN.AX ($A) 0.048413 0.20 0.009683 0.43 0.09
Expected Return 0.000712 0.38
Tri-star management wants to invest their money in the share of the five companies in which
they can optimize their fund to achieve high growth in the market. It is suggested that the
company invest their money in the portfolio in which each of the bonds equally participates so
that the company can achieve profit from their investment activities. As the expected rate of
return is 0.000712 which enable management to achieve the profit from the portfolio so that they
are able to maximize the wealth of investor in the market.
10

Conclusion
In this study portfolio of the company is evaluated so that proper or adequate investment
decision can be taken by an investor or the management of the company. Further, in this study,
all the share of five listed company is compared with average rates in the context of security so
that management of the company are able to draft portfolio and take corrective action to
maximize their wealth in the market.
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Reference
 Alp, A., & Bilir, H. 2015, Beta Calculation and Robust Regression Methods: An Example
From The Istanbul Stock Exchange, International Research Journal of Marketing and
Economics, 2(11).
 Chandra, P. 2017, Investment analysis and portfolio management, McGraw-Hill Education,
 Corporatefinanceinstitute, 2019, What is the Required Rate of Return?, [Online],
Corporatefinanceinstitute, Available at:
https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/required-rate-of-
return/ [Accessed on 28.04.2019].
 Habibi, H., Habibi, R., & Habibi, H. 2016, Derivation of Kalman Filter Estimates Using
Bayesian Theory: Application in Time Varying Beta CAPM Model, Journal of Statistical and
Econometric Methods, volume -5(2), Page - 1-16.
 Hu, G., & Jacobs, K. 2017, Volatility and expected option returns, Available at SSRN
2695569.
 Wallstreetmojo, 2019, Portfolio Standard Deviation, [Online], Wallstreetmojo, Available at:
https://www.wallstreetmojo.com/portfolio-standard-deviation/ [Accessed on 28.04.2019].
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