Portfolio Analysis and Expected Returns: Finance for Managers

This report provides a comprehensive analysis of expected returns, standard deviation, and portfolio beta for Adairs company, a reference company, and a market index. Using historical monthly rate of return data, the report calculates average monthly returns and standard deviations for each entit...Read More

ASSESSMENT 3,
FINANCE FOR
MANAGERS

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
1. (a) Historical monthly rate of return for the market index.................................................3
1. (b) Historical average monthly rate of return and standard deviation of returns...............3
2.(a) expected return for the share..........................................................................................6
2. (b) expected portfolio return and beta of the portfolio in which 60% investment is made in
Adairs company and 40% is in reference company...............................................................7
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
This report will cover expected return which is provided by company to its investor.
Further, this report will also compute historical average monthly rate of return and standard
deviation of Adairs(ADH) company, references company and market index. Further, this report
will analyse the portfolio which consist the investment of 60% in Adair's company and 40% in
references company. Moreover, CAPM method is used to evaluate the expected return and beta
for the share of case company and reference company (Doyle, 2017). At the end, expected return
and beta will be calculated by taking the base of portfolio which is made with case company and
reference company.
MAIN BODY
1. (a) Historical monthly rate of return for the market index
Monthly rate of return
Month Total market index return Monthly rate of return
((ending price – starting price)*100 / starting price )
Jan 74649
Feb 75713 1.43%
March 77109 1.84%
April 80129 3.92%
May 81695 1.95%
June 83786 2.56%
1. (b) Historical average monthly rate of return and standard deviation of returns
 Average monthly rate of return and standard deviation of Adairs company
Average monthly rate of return
Month ADAIRS monthly rate of
return
Jan

Feb 4.96%
March 3.15%
April 22.11%
May 3.02%
June -11.09%
Average return 4%
Average monthly return = Sum of total return from January to June / 5
=4.96%+3.15%+22.11%+3.02%+(-11.09%) / 5
=4% or 4.43%
It is showing that investors earn on an average 4% return every month. This allows investor to
analyse the micro factor of the company (Kurek and Górowski, 2020).
standard deviation of Adairs company
Month ADAIRS (x- mean) (x – mean)^2
Jan
Feb 4.96% 0.53% 0.00002809
March 3.15% -1.28% 0.00016384
April 22.11% 17.68% 0.03125824
May 3.02% -1.41% 0.00019881
June -11.09% -15.52% 0.02408704
Sum 0.05573602
√((x- mean)^2)/ n-1 0.013934005
12%
Standard deviation measures the risk that is an investment fluctuate from its expected return. The
standard deviation value 12% shows the less risk in the investment of Adairs company (Max and
Bilinski, 2021).
 Average monthly rate of return and standard deviation of Reference company
Reference company
Month Reference company
Jan
Feb 10.00%

March 1.00%
April -5.00%
May 5.00%
June 15.00%
Average monthly return = Sum of total return from January to June / 5
=10.00%+1.00%+(-5.00)%+5.00%+15.00% / 5
=5.20% or 5%
investor gets approx. 5.20% average monthly return by investing in reference company.
Reference company
Month
Reference
company's
monthly
return
Deviation Deviation squared
Jan
Feb 10.00% 7.66% 0.0058689888
March 1.00% -1.34% 0.0001793102
April -5.00% -7.34% 0.0053861911
May 5.00% 2.66% 0.0007080562
June 15.00% 12.66% 0.0160299213
Average return 5% Variance 0.0070431169
standard deviation 8% Standard deviation 8%
The standard deviation value 0.08 shows the less risk by investing in references company.
 Average monthly rate of return and standard deviation of Market index
Market index

Month market index
Jan
Feb 1.43%
March 1.84%
April 3.92%
May 1.95%
June 2.56%
Average monthly return = Sum of total return from January to June / 5
=(1.43%+1.84%+3.92%+1.95%+2.56%) / 5
=2.34% or 2%
Standard-deviation of Market index
Month
market
index (x- mean) (x – mean)^2
Jan
Feb 1.43% -0.91% 0.00008281
March 1.84% -0.50% 0.000025
April 3.92% 1.58% 0.00024964
May 1.95% -0.39% 0.00001521
June 2.56% 0.22% 0.00000484
0.0003775
√((x- mean)^2)/ n-1 0.000094375
1%
 Computation of average monthly rate of return and standard deviation of the
portfolio which consist of 60% investment in Adairs company and 40% investment
in reference company

average monthly rate of return= weight of Adairs company * average return of Adairs + weight
of reference company * average return of reference company
=60% * 4.43% + 40% * 5.20%
=4.47%
Standard deviation of portfolio
company weight
Average
monthly return
Weighted monthly
return (x-mean) (x-mean)^2
Case company 60.00% 4.43% 0.02658 -2.08% 0.00043264
Reference company 40.00% 5.20% 0.0208 -2.66% 0.0007064964
√((x- mean)^2)/ n-1 0.0011391364
3%
Standard deviation is 3%
2.(a) expected return for the share with the help of CAPM method
1. Adairs company
Adairs company Beta 1.45
yield for 10 years government
bond as on (24/9/2021) 1.39%
Market premium 5.00%
Rf = Risk free return + beta (market risk premium)
=1.39% + 1.45 * 5.00%
=8.64%
Investors is expecting extra return from the investment in the Adairs company. Further, it is
because investor can earn 1.39% by investing in some other risk free bond but investor choose to
take risk by investing in Adairs company (Roth And et.al., 2018).
2. Reference company
Reference company Beta 0.5
yield for 10 years government bond as on
(24/9/2021) 1.39%

market premium 5.00%
Rf = Risk free return + beta (market risk premium)
=1.39% + 0.5 * 5.00%
=3.89%
Investor expect 3.89% rate of return by investing in reference company. Reference company has
high beta which shows high fluctuation.
2. (b) expected portfolio return and beta of the portfolio in which 60% investment is made in
Adairs company and 40% is in reference company
company weight Expected return Beta
Adairs company 60.00% 8.64% 1.45
Reference company 40.00% 3.89% 0.5
Total 7% 1.07
Expected return from the portfolio (Rf)
=weight of Adairs x expected return of Adairs + weight of reference company x expected return
of Adairs
=60% x 8.64% +40% x 3.89%
=7%
Expected return= 7% from this portfolio.
Investor expect 7% the rate of return by investing in the portfolio which consist 60% investment
in Adairs company and 40% investment in reference company.
company weight beta
Adairs company 60.00% 1.45
Reference company 40.00% 0.5
Beta 1.07
Beta of the portfolio = Weight of adairs x beta of adairs +Weight of reference x beta of
reference
=(60% x 1.45) + (40% x 0.5)
= 1.07

Volatility of the portfolio can be determined by beta. The value of beta 1.07 shows high
fluctuation in the portfolio (Ali and Badhani, 2021).
CONCLUSION
Investor expects more return in case of taking more risk. Adairs company has high
expected rate of return as compare to reference company because of high beta which is showing
high fluctuation. Moreover. The portfolio which is made of case company and reference
company has shown high beta which means it is riskier to invest in the portfolio. Investment in
case company is much safer than reference company.
REFERENCES
Books and journal
Doyle, J.M., 2017. Persistence in the long-run expected rate of return for corporate pension
plans. The Quarterly Review of Economics and Finance. 63. pp.271-277.
Kurek, B. and Górowski, I., 2020. Gender and Age as Determinants of Expected Rate of Return
on Human Capital. Central European Management Journal. 28(4). pp.30-50.
Max, S. and Bilinski, P., 2021. Information Quality and the Expected Rate of Return: A
Structural Equation Modelling Approach. Asia-Pacific Financial Markets.
Roth, P.L. And et.al., 2018. Using beta coefficients to impute missing correlations in meta-
analysis research: Reasons for caution. Journal of Applied Psychology. 103(6). p.644.
Ali, A. and Badhani, K.N., 2021. Beta-anomaly: evidence from the Indian equity market. Asia-
Pacific Financial Markets. 28(1). pp.55-78.
Standard deviation.2021. [online]. Available
through:<https://www.fincash.com/l/equity/standard-deviation>