Fundamental of Finance: Investment Analysis, Risk, and Return

This assignment delves into the fundamentals of finance, covering key concepts such as beta, Capital Asset Pricing Model (CAPM), and investment analysis techniques. It evaluates the risk associated with different stocks based on their beta values, highlighting Pfzier as the least risky and The Home Depot as the riskiest. The assignment further explores portfolio construction, emphasizing the preference for low beta portfolios to reduce overall investment risk. It discusses three major project analysis techniques: Net Present Value (NPV), Internal Rate of Return (IRR), and Payback Period, explaining their respective roles in assessing project viability and returns. The Modified Internal Rate of Return (MIRR) is favored over IRR for its accuracy in measuring the true rate of return. The assignment concludes by advocating for the use of cash flow analysis in evaluating project desirability, emphasizing its importance in providing accurate results for investment appraisal techniques. Desklib offers this solved assignment and many more to aid students in their studies.

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

FUNDAMENTAL OF FINANCE
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Table of Contents
Answer to 1:...............................................................................................................................2
Answer to 2:...............................................................................................................................2
Answer to 3:...............................................................................................................................2
Answer to 4:...............................................................................................................................3
Answer to 5:...............................................................................................................................3
Answer to 6:...............................................................................................................................3
Answer to 7:...............................................................................................................................3
Answer to 8:...............................................................................................................................4
Reference:..................................................................................................................................5

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Answer to 1:
Beta can be identified as the measure, which is used by investors in identifying
volatility and systematic risk of stock or portfolio. Capital Asset Pricing Model is the
calculation, which allows investor to identify expected returns of the stock on the basis of
market expected return, risk free asset and beta of the stock (Chandra, 2017).
Answer to 2:
Stocks Name Beta
The Home Depot Stock 1.01
Pfzier Stock 0.31
Exxon Mobile 0.86
From the overall evaluation Pfzier Stock is mainly identified to be the least risky
stock, as its beta was at the levels of 0.31. Stocks having low beta is considered a low risk
stock, as its share price is not highly volatile. On the other hand, the riskiest stock is The
Home Depot Stock, which has high beta of 1.01. The beta higher than 1 indicates that
volitively of the capital market is directly transferred to the share price of company.
Answer to 3:
The portfolio with the beta of 1 will adequately move up to down in the same degree,
as the stock market. In addition, to increase than the stock market value, the beta of portfolio
needs to be either high than 1 or less than 1.

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Answer to 4:
The preference for the portfolio will be low beta, as it might help in reducing the
overall risk from investment, which increases the returns from investment. The combination
of mix stocks could allow portfolio to be created in accordance with the minimum portfolio
variance (Bennette et al., 2015).
Answer to 5:
The three techniques that could be selected for analysing a major project are Net
Present Value (NPV), Internal rate of return (IRR) and Payback period. The selection of NPV
is mainly conducted to detect financial vitality of the project, where actual increment in firm
value can be detected. In addition, IRR is used in understanding the rate of return in which
the project will deliver the return to the company. Lastly, the payback period is used in
detecting the projects capability to quickly payback the initial investment (Baum & Crosby,
2014).
Answer to 6:
IRR and MIRR method are under similar attributes, which indicates that using either
MIRR or IRR is better for evaluating the project. Therefore, the selection of MIRR is more
adequate, as it measures the true rate of return.
Answer to 7:
The selection process does not include both payback period and discounted payback
period, as it delivers same results of the project. Hence, choosing any of the feature could
help in detecting financial viability of the project. The discounted payback period is
preferable, as it accommodates the negative impact of time value of money, which is
neglected by traditional payback period method (Li & Trutnevyte, 2017).

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Answer to 8:
Using the cash flow will be more accurate for analysing the project for desirability
usage, as techniques for investment is analysed based on cash flow. In addition, it could be
understood that without the depiction of accurate cash flow the investment appraisal
techniques will not provide accurate result of the project. Hence, usage of the most accurate
projections of cash flows is needed which analyses projects desirability.

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Reference:
Baum, A. E., & Crosby, N. (2014). Property investment appraisal. John Wiley & Sons.
Bennette, C. S., Roth, J. A., Basu, A., Carlson, J. J., Ramsey, S., & Veenstra, D. L. (2015).
Optimizing Cancer Clinical Trials Research Investment Decisions In The United
States: A Proof Of Concept Portfolio Management Evaluation. Value in Health, 18(3),
A8.
Chandra, P. (2017). Investment analysis and portfolio management. McGraw-Hill Education.
Li, F. G., & Trutnevyte, E. (2017). Investment appraisal of cost-optimal and near-optimal
pathways for the UK electricity sector transition to 2050. Applied energy, 189, 89-
109.