ACC00716 Finance: Investment Analysis using Expectation Theory

This finance case study assesses the expectation theory and its implications for investment decisions, utilizing the Capital Asset Pricing Model (CAPM) to interpret return and risk measures. It evaluates the risk-free rate, market risk premium, and beta of a case company (MYOB) and a hypothetical company to determine expected returns. The analysis includes a portfolio construction, combining both companies to minimize risk and improve returns. The study highlights how beta affects investor expectations and how portfolio diversification can optimize risk-adjusted returns. The findings suggest that investors can use risk and return attributes to create portfolios with lower risk and higher returns. The document concludes with a reference list.

Running head: FINANCE
Finance
Name of the Student:
Name of the University:
Authors Note:

FINANCE
1
Table of Contents
3.a Evaluating the expectation theory and including its implication on chosen company while
interpreting the return and risk measure:...................................................................................2
Reference and Bibliography:......................................................................................................6

FINANCE
2
3.a Evaluating the expectation theory and including its implication on chosen company
while interpreting the return and risk measure:
The expectation theory relevantly indicates the desire of the investors regarding the
returns from an investment. In addition, the CAPM model relevantly supports the overall
expectation theory, as it evaluates marketing return, risk free return and beta of the stock to
determine the returns, which could be provided from an investment. The expectation theory
relevantly indicates the behaviour of an investor regarding the return generation capability of
the stock. In this context, Arısoy, Altay-Salih and Akdeniz (2015) stated that investors by
utilising the CAPM returns can understand the risk and return attributes of an investment.
The expectation theory is relatively based on the forecast of short term returns that could be
provided from investment. In addition, the expectation theory relatively holds all grounds
within the financial and investment sector, as investors evaluate the performance and
behavior of the company before expecting the returns from investment. The expectation
theory revolves on certain principle such as risk and return attribute, which directly involves
investors to improve their current return generation capacity.
The expectation theory is relatively utilized to explain the yield curve that is provided
from an investment. However, Barberis et al. (2015) argued that due to the estimation
capacity of expectation theory the overall returns provided from an investment is over
estimated, which relatively reduces the actual income obtained by the investor from the
investment. Expectation theory is a relatively a measure used by investors to evaluate the
theoretical returns that could be generated from an investment, which is relevantly not same
as the actual returns. However, with the help of expectation theory the investors are able to
goes into the investment returns that could be provided in your future. The calculations of

FINANCE
3
Capital Asset pricing model are conducted to detect whether the investment is viable
investment opportunity for the investor.
Particulars Value
Risk-free rate proxy 2.83%
Market risk premium 6.50%
Case company beta 0.48
Case company expected return 4.59%
Hypothetical company beta -0.25
Hypothetical company expected return 1.91%
The above table focuses on deriving the risk-free rate, market premium, and beta of
selected companies to determine the overall expected return from the particular stocks. The
overall hypothetical company relevantly has a negative beta, which derive the overall
expected return to 1.91%. On the other hand, the beta of MYOB is relatively at the levels of
0.48, which relatively increases the expected return of an investor to 4.59%. The difference in
expected return of case company and hypothetical company is due to its beta or risk involved
in investment. The high value of beta increases expected return of investors, as they have to
incur more risk from volatile market to keep the investment. Therefore, the amount of risk
involved in investment would eventually increase the expectation level of investors regarding
the returns from investment. However, the hypothetical company beta is relatively negative,
which minimizes the negative impact of risk that could be portrayed by the capital market.
This is the main reason why the expected return from the hypothetical company is relatively
lower than the case company expected return. In this context, Hoffmann and Post (2017)
stated that the derivation of Capital Asset pricing model allows investors to where the risk
attributes of an investment and make adequate investment decisions. On the other hand,

FINANCE
4
Huang, Ma and Nakata (2017) argued that Capital Asset pricing model relatively Is not able
to identify the actual the risk involved in investments and the return that can be provided
from stocks, as it only evaluates beta in the equation.
Moreover, the above calculation directly supports the expectation theory of a
particular investor in the current investment scenario. The calculations conducted in the
above table relatively provides the model of Capital Asset pricing, which uses beta and derive
the expected return of an investor in a company. The expectation theory is relatively focused
on the behavior of individual regarding certain circumstances or situation. In addition, the
above calculations relatively support the expectation theory, where stocks with low beta are
expected to deliver reduced Returns, while the stocks with high beta is expected to provide
increased Returns. This measure is relatively conducted on the basis of Expectations of a
particular Investor by evaluating the market return and risk-free rate. Beta is relatively
considered the risk amount a person is able to take while investing in a particular investment.
Moreover, beta is considered to be the Percentage of impact a stock has from the volatile
capital market (Kerzner and Saladis 2017).
Particulars Expected
return
Beta Portfolio
weight
Contribution to portfolio
expected return
Contribution to
portfolio beta
Case company 4.59% 0.48 50% 2.29580000% 0.24
Hypothetical
company
1.91% -0.25 50% 0.95625000% -0.13
Total 100%
Portfolio expected return 3.25%
Portfolio beta 0.12

FINANCE
5
The above table relevantly evaluates the portfolio, which is created between the case
company and hypothetical company. The expected return, beta, and portfolio weights is
relatively used in deriving the overall expected portfolio returns from the investment. This
would eventually help in minimizing the negative impact from market volatility, while
improving the returns that could be generated from investment. Moreover, the calculations
relevantly help in detecting that the portfolio returns are at the levels of 3.25%, while the
portfolio beta is at the levels of 0.12. The portfolio return is relatively adequate, as it
combines both risk and return attributes, which could be generated from an investment. This
combination has a relatively provided a return, which has low risk involved in investment
while providing a higher return. Ruiz and Breuer (2018) stated that with the help of risk and
return attributes investors can evaluate two different type of stocks and create a portfolio,
which could have low risk while generating higher returns from investment. This method of
investments is relatively conducted by investors to improve their future gains and minimize
the negative impact from volatile capital market. However, Arısoy, Altay-Salih and Akdeniz
(2015) argued that the risk involved in investment relatively increases, when the capital
market is in recession, as it hampers financial growth and prospects of an investment.

FINANCE
6
Reference and Bibliography:
Arısoy, Y.E., Altay-Salih, A. and Akdeniz, L., 2015. Aggregate volatility expectations and
threshold CAPM. The North American Journal of Economics and Finance, 34, pp.231-253.
Barberis, N., Greenwood, R., Jin, L. and Shleifer, A., 2015. X-CAPM: An extrapolative
capital asset pricing model. Journal of financial economics, 115(1), pp.1-24.
Finance.yahoo.com. (2018). MYO.AX : Summary for MYOB GROUP FPO - Yahoo Finance.
[online] Available at: https://finance.yahoo.com/quote/myo.ax?ltr=1 [Accessed 20 Apr.
2018].
Hoffmann, A.O. and Post, T., 2017. How return and risk experiences shape investor beliefs
and preferences. Accounting & Finance, 57(3), pp.759-788.
Huang, L., Ma, C. and Nakata, H., 2017. w-MPS risk aversion and the shadow CAPM: theory
and empirical evidence. The European Journal of Finance, 23(11), pp.947-973.
Investing.com Australia. (2018). Australia 10-Year Bond Yield - Investing.com AU. [online]
Available at: https://au.investing.com/rates-bonds/australia-10-year-bond-yield [Accessed 20
Apr. 2018].
Kerzner, H. and Saladis, F.P., 2017. Project management workbook and PMP/CAPM exam
study guide. John Wiley & Sons.
Ruiz de Vargas, S. and Breuer, W., 2018. Corporate Valuation in an International Context
with the Global CAPM from a German Perspective.7