BAO2001 Corporate Finance Assignment: Risk, Return, and Analysis

This assignment solution analyzes risk, return, and equity for three companies using provided data and exhibits. It calculates average monthly returns, standard deviations, and coefficients of variation to assess risk profiles. The solution explores portfolio diversification, comparing two-asset and three-asset portfolios, and determining the efficient portfolio. The analysis includes the variance-covariance matrix, systematic risk through beta coefficients, and risk assessment for diversified portfolios. The assignment also discusses the implications of beta coefficients and the best measure of risk for a diversified portfolio, providing a comprehensive overview of corporate finance principles.

Corporate Finance 1
Corporate Finance
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Corporate Finance 2
1.
The average monthly returns for the three companies are as shown in the table below:
Table 1: Returns summary statistics
WBC Returns AMC Returns AVEO Returns
Average Monthly Returns 0.001352 0.003672 0.03223
Standard Deviation of Returns 0.052637 0.11517 0.348554
2.
Table 2: Coefficient of variation
WBC Returns AMC Returns AVEO Returns
Average Monthly Returns 0.001352 0.003672 0.03223
Standard Deviation of Returns 0.052637 0.11517 0.348554
Coefficient of Variation 38.92589 31.36296 10.81456
An investor who is risk-averse should consider assets with a historically degree of
volatility that is low but with a degree of returns that is high. Hence, the investor should
invest in AVEO which has the lowest degree of variation of 10.81 with the highest degree
of returns of 3.22%.
On the other hand, a risk-seeking investor should look into assists with a historically
degree of volatility that is high. Hence, the investor should choose WBC with the highest
volatility at 38.93 and AMC with a volatility of 31.36.

Corporate Finance 3
A risk neutral investor should look to invest in assets with a historically medium degree
of volatility. Hence, the best place to invest would be in AMC with neutral volatility of
31.36.
3.
Table 3: Variance-Covariance Matrix
All-Ordinary
Index. WBC AMC AVEO
All-Ordinary
Index. 0.00106675 0.00129973 0.00141424 -0.00021999
WBC 0.00129973 0.00279022 0.00225436 0.000938286
AMC 0.00141424 0.00225436 0.01344544 -0.00143314
AVEO -0.00021999 0.00093829 -0.00143314 0.119150284
From table 3, it is evident that the all ordinary index moves together with WBC and
AMC (positive covariance). Moreover, WBC also moves together with AMC and AVEO
(positive covariance). However, AVEO has opposite returns with the all-ordinary index
and AMC (negative covariance).
Based on the correlations, it can be seen that the three stocks and the all-ordinary index
slightly move in the same directions (the correlations are greater than 0).
4.
Table 4: AVCO & AMC
Portfolio Average Returns -0.004818434
Portfolio Standard Deviation 0.479739401
Table 5: AVCO & WBC
Portfolio Average Returns -0.004001183
Portfolio Standard Deviation 0.446295815

Corporate Finance 4
Table 6: AMC & WBC
Portfolio Average Returns -0.000116048
Portfolio Standard Deviation 0.291458365
5.
A three-asset portfolio is more complex since it involves obtaining a variance-
covariance matrix for computation, unlike the two-asset portfolio which only involves
the correlations.
Table 7: Three-asset portfolio
Portfolio Average Returns -0.002978555
Portfolio Standard Deviation 0.414331309
A three-asset portfolio is more efficient than a two-asset portfolio as it minimizes risk
while maximizing the returns.
6.
Table 8: Systematic risk
WBC AMC AVEO
Beta 0.465859 0.105201 -0.00184
The betas of WBC and AMC are positive hence the stocks swing with the market
movement. However, AVEO has a negative beta hence the stock swings in the positive
direction as the market movement.

Corporate Finance 5
Consequently, the beta of WBC is greater than AMC hence implying that AMC poses
less risk than WBC but with lower returns.
7.
The beta coefficient is used in measuring the systematic risk of investment while the
standard deviation is used in measuring the total risk of an investment. Hence, the beta
coefficient is the most appropriate measure of risk for a diversified portfolio since it
considered the undiversifiable risk.