ACC00716 Finance Report: CAPM, Portfolio, and Risk Analysis

This finance report analyzes investment options using the Capital Asset Pricing Model (CAPM) to aid investors in making informed decisions. It explores systematic and unsystematic risks, emphasizing diversification strategies to mitigate investment risks, and also discusses portfolio construction to enhance returns. The report uses the Security Market Line (SML) to graphically represent portfolio risk and return, specifically for the business of JB Hi Fi, demonstrating the relationship between portfolio risk and return. The report concludes by highlighting how investors can minimize investment risks by using portfolio formulation and diversification strategies.

Running head: FINANCE
Finance
Name of the Student:
Name of the University:
Author’s Note:

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Table of Contents
Requirement 1a................................................................................................................................2
Requirement 1b................................................................................................................................2
Requirement 1c................................................................................................................................2
Requirement 1d................................................................................................................................2
Requirement 1e................................................................................................................................3
Requirement 1f................................................................................................................................3
Requirement 2a................................................................................................................................3
Requirement 2b................................................................................................................................4
Requirement 3a................................................................................................................................4
Introduction..................................................................................................................................4
Application of CAPM Approach.................................................................................................4
Impact of Systematic and Unsystematic risks.............................................................................5
Security Market Line...................................................................................................................5
Conclusion.......................................................................................................................................7
References........................................................................................................................................8

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Requirement 1a
Requirement 1b
Requirement 1c
Requirement 1d

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Requirement 1e
Requirement 1f
Requirement 2a

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Requirement 2b
Requirement 3a
Introduction
The question requires detailed analysis of theories and concepts which can be used by
potential investors in making investment decisions for different stock options (Alqisie and
Alqurran 2016). In addition to this, a detail discussion on systematic and unsystematic risks
would also be undertaken in the below paragraphs. The discussion would also include analysis of
portfolio and diversification strategies which can be applied by the investor in order to determine
the overall impact of the investment options on the long-term position of the investor.
Application of CAPM Approach

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Figure 1: CAPM formula
Source: (Rossi 2016)
The formula which is shown in the above figure is of CAPM theory which effectively
considers the expected rate of return, risk free rate of return, market rate of return and beta for
computation (Bodie, Kane and Marcus 2013). The CAPM model effectively shows the
relationship between the systematic risks and expected return from the stock. It is to be noted
that a potential investor is able to combine low risks securities and high-risk securities to form a
portfolio with the help of CAPM model. This way the investors are able to create the perfect
portfolio which can enhance returns from the stocks.
Impact of Systematic and Unsystematic risks
Systematic risk and Unsystematic risks both forms a part of the total risks which is
associated with an investment. The objective of the investors is to adopt such strategies which
would effectively minimize the risks associated with the stock (Rossi 2016). Moreover, one such
strategy which is followed by investor is diversification which allows the investors to eliminate
or reduce the negative impacts of risks from a stock (Robiyanto 2017). The investor also has the
option of applying hedging techniques for minimizing the unsystematic risks which is related to
the stock.
Security Market Line
Security Market line is a graphical representation of the formula of CAPM and
effectively demonstrates the portfolio risks and returns. The figure which is presented below
shows the SML line for the business of JB Hi Fi

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The figure effective shows the Security Market line which is sloping upwards and, on the
line, portfolio return and risks are effectively presented which signifies that the formula is
correctly applied by the investor (Zabarankin, Pavlikov and Uryasev 2014). The overall portfolio
return is shown to be 1.47 and the portfolio risks is shown to be 0.13 which represents the beta of
the portfolio. The combination of equal portfolio weight relatively reduces the overall risks
which is related to the combined portfolio.

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Conclusion
The discussion above shows the analysis of investment options available to an investors
and how the investor can minimize the risks which is associated with the investment by
formulating a portfolio or apply diversifying strategies. The discussion above shows analysis for
the business of JB Hi Fi and effectively presents the overall return and risks of its portfolio in the
Security Market line.

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References
Alqisie, A. and Alqurran, T., 2016. Validity of Capital Assets Pricing Model (CAPM)(Empirical
Evidences from Amman Stock Exchange). Journal of Management Research, 8(1), pp.207-223.
Bodie, Z., Kane, A. and Marcus, A.J., 2013. Investments and portfolio management. McGraw
Hill Education (India) Private Limited.
Robiyanto, R., 2017. Performance evaluation and risk aversion rate for several stock indices in
Indonesia Stock Exchange. Jurnal Manajemen dan Kewirausahaan, 19(1), pp.60-64.
Rossi, M., 2016. The capital asset pricing model: a critical literature review. Global Business and
Economics Review, 18(5), pp.604-617.
Zabarankin, M., Pavlikov, K. and Uryasev, S., 2014. Capital asset pricing model (CAPM) with
drawdown measure. European Journal of Operational Research, 234(2), pp.508-517.