Analysis of Risk-Return Profile in Investment Choices

The task at hand involves an in-depth examination of four companies: Melbourne IT (MLB), Fortescue Metal (FMG), BHP Billiton Limited (BHP), and Commonwealth Bank of Australia (CBA). The objective is to assess the risk-return profiles for individual investments as well as a diversified portfolio choice. The analysis begins by evaluating each company's business operations, highlighting key aspects such as Melbourne IT's internet services in Australia, Fortescue Metal's iron-ore production, BHP Billiton's mining and petroleum endeavors, and Commonwealth Bank's financial services across several countries. Correlation between companies is then calculated to determine the impact of diversification on risk levels; notably, a high correlation is found between BHP Billiton and Fortescue Metal due to their presence in the mining industry. The assignment progresses with an evaluation of two investment choices based on risk-return trade-offs, concluding that Choice 2 offers a more favorable balance through effective portfolio diversification. Finally, calculations for expected return and standard deviation are drafted to quantify Janson’s overall portfolio performance, incorporating risk mitigation via strategic asset weighting. References include reputable sources such as ABC News, ASX, Yahoo Finance, and academic works on global financial crime and corporate governance.

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

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Table of Contents
Question 1:.................................................................................................................................2
a. Depicting whether Jason must pay mortgage insurance in 5 years:.......................................2
b. Depicting the monthly mortgage instalment of Jason if he intends to pay off in 25 years:...2
c. Depicting how long will Jason take to pay off the mortgagee:..............................................3
Question 2:.................................................................................................................................3
a. Briefly explaining the CVBA’s scandal and indicating how the investors responded to the
scandal:.......................................................................................................................................3
b. Depicting corporate governance and stating whether CBA’s board of directors, senior
management or both should be responsible for the incident:.....................................................4
c. Depicting money laundering and indicating its effect on financial system:..........................4
Question 3:.................................................................................................................................5
a. Depicting the securities that should be purchased by James:.................................................5
b. Depicting the annualised return assuming compounding interest rate:.................................7
Question 4:.................................................................................................................................7
a. Calculating the expected return and standard deviation for portfolio and four shares:.........7
b. Stating the business of four companies and calculating the correlation between two
companies:..................................................................................................................................8
c. Identifying the most viable choice based on risk-return profile:............................................9
d. Drafting the calculation for expected return and standard deviation of Janson’s portfolio: 10
Reference:................................................................................................................................12

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Question 1:
a. Depicting whether Jason must pay mortgage insurance in 5 years:
Jason needs to pay the mortgage insurance in 5 years, as the overall instalment money
has been deposited in the bank account. The instalment amount mainly amounts to 129,953,
while the total deposits in the bank account is 192,643.
b. Depicting the monthly mortgage instalment of Jason if he intends to pay off in 25
years:

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c. Depicting how long will Jason take to pay off the mortgagee:
Question 2:
a. Briefly explaining the CVBA’s scandal and indicating how the investors responded to
the scandal:
Commonwealth bank is mainly accused of anti-laundering law breaches, which
directly depicts the unethical measures conducted in its operations. In addition, the company
has been assessed for 53,800 counts of breaches, which has been conducted by
Commonwealth Bank. Moreover, CBA also failed to detect terrorism financing, which was
conducted from their accounts on 38 different instances (ABC News 2017). This series of
manipulation and money laundering conducted by the company initiated the relation from
both investors, board and authorities. The Australian authorities mainly acted against the
company by insisting different level of penalties with court case. In response to which the
management is fighting with the Australian authorities. However, the management also came
up with relevant announcement regarding the detection problems within the organisation.
Moreover, the management also acknowledged the lawsuit and made relevant announcement
with a short statement. The investors did not take this combined news lightly, where around
$7.8 billion in share value of Commonwealth Bank declined in the next day of trading. This
loss was mainly due to the fall of $3.25 a share of commonwealth bank, where its prices fell
from $84.69 to $80.11.

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This rapid decline in the overall share value instigated another round of legal claims,
which was portrayed by the investors. This directly resulted in a law suit of $100 million plus
claims from the investors, due to the unethical measures taken by Commonwealth bank. The
continuous problems faced by the company has mainly reduced trust of the investors in
operation of the bank, which in turn has reduced the share value to 73.23 in September 2017.
This increased loss incurred by the shareholders mainly resulted in additional claims and law
suits conducted by investors (ABC News 2017).
b. Depicting corporate governance and stating whether CBA’s board of directors,
senior management or both should be responsible for the incident:
Corporate governance is mainly a system of rules, process, and practices, which helps
in controlling the overall company (Tricker and Tricker 2015). The corporate governance
mainly helps in controlling the overall ethical measures, which are conducted within the
organisation. In addition, corporate governance also helps in improving ethical operations of
the organisation. Hence, board of directors, and senior management both are responsible for
the corporate governance, which is used within the organisation. Therefore, the money
laundering scandal conducted by the company mainly indicates the overall loss in control by
the board and senior management. Hence, both directors and senior management is
responsible for the unethical measures taken by their employees.
c. Depicting money laundering and indicating its effect on financial system:
Money laundering is mainly the concealment of the origins of illegal obtained money
by individuals. The money laundering has drastic effect on the financial system, where actual
revenue of the organisation and individuals are not detected. The supressing of actual income
is conducted with money laundering, where actual money is being transferred from the
country to other (Masciandaro 2017). This relevant transfer of income from one country to

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other directly reduces the flow of cash in the financial system. The reduction in cash flow
reducing the function of the financial system, where adequate cash is not presented to support
their operations. In addition, the money laundering process also increases the illegal cash in
the economy, where the supply of money is increased. Other forms of money laundering
process are conducted from casinos, trade based laundering, and real estate, which is
conducted with the intervention of financial system.
Question 3:
a. Depicting the securities that should be purchased by James:

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From the overall evaluation relevant purchase of one commercial paper is only
feasible, as its actual rate of retune is higher than the required rate of retune. Hence, Jason
should only purchase commercial paper for its investment.

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b. Depicting the annualised return assuming compounding interest rate:
Question 4:
a. Calculating the expected return and standard deviation for portfolio and four shares:
The above figure mainly indicates the overall expected return and standard deviation
of four stocks and portfolio. Moreover, based on risk-return profile Commonwealth bank is
identified to be the most viable option for investment, as it helps in improving relevant
profitability of the investor. The company has the second least risk profile, while is providing
the second highest return to the investors. Hence, it could be understood that Commonwealth
bank companies with the overall risk and return standards. Moreover, the portfolio is also
providing adequate returns, while relevant risk is close the commonwealth bank. This
indicates that the overall risk-return profile of the portfolio is relevantly adequate, where the

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investor could generate adequate returns from diversified risk. Thus, the portfolio of Jason
has return of 1.40%, while risk is at 5.44%.
b. Stating the business of four companies and calculating the correlation between two
companies:
Melbourne IT (MLB):
Situated in Australia the company is mainly connecting 700,000 Australian business
to the internet. Melbourne IT is mainly an internet company, which provides support to small
and medium business across Australia. The company is currently generating a revenue of
A$90 million from its operations conducted in Australia (Asx.com.au 2018).
Fortescue Metal (FMG):
Being in iron-ore sector Fortescue metal is identified to be one the largest producers
of iron ore in the world. The company holds the largest iron mining field in Australia, which
makes BHP Billiton and Rio Tinton its major competitors.
BHP Billiton Limited (BHP):
One of the largest mining company in the world, whose operations are conducted in
different regions of the world. BHP Billiton is the largest provider of petroleum and metal
products. During the survey of 2015 it was detected that BHP Billiton is the largest mining
company in the world (Asx.com.au 2018).
Commonwealth Bank of Australia (CBA):
The Multination banks mainly operates in New Zealand, Fiji, Asia, USA, and UK,
while providing services such as accept deposits, provide loans, and financial service to

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customers. Commonwealth bank of Australia provides retail banking, wealth management,
premium business service and executive services.
From the evaluation of business of all four companies BHP Billiton and Fortescue
Metal is detected to have high correlation. Both the companies operate in mining industry and
they are major competitors, which increases the correlation between them. Moreover, the
above table mainly supports the evaluation as correlation value between BHP and FMG is
0.67, which is relatively higher in comparison with other companies (Asx.com.au 2018).
c. Identifying the most viable choice based on risk-return profile:

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The evaluation of above table mainly helps in detecting the risk and return of both
choice 1 and 2. However, selection of Choice 2 is much more feasible, as the risk level is
relatively low, while the return is adequate. This mainly indicates the overall diversification
is conducted on choice 2, where risk profile mainly changes risk and return of the portfolio.
The diversification on portfolio is mainly conducted based on weights, which allows the
investors to reduce risk from investment and improve return of the portfolio.
d. Drafting the calculation for expected return and standard deviation of Janson’s
portfolio:

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Reference:
ABC News. (2017). CBA faces 'very large' shareholder action on money laundering. [online]
Available at: http://www.abc.net.au/news/2017-08-23/commonwealth-bank-faces-
shareholder-class-action/8833860 [Accessed 30 Jan. 2018].
Asx.com.au. (2018). Home - Australian Securities Exchange - ASX. [online] Available at:
http://www.asx.com.au/ [Accessed 30 Jan. 2018].
Au.finance.yahoo.com. (2018). Business, Investments, Stocks & Quotes - Yahoo7 Finance.
[online] Available at: https://au.finance.yahoo.com/ [Accessed 30 Jan. 2018].
Masciandaro, D. ed., 2017. Global financial crime: terrorism, money laundering and offshore
centres. Taylor & Francis.
Tricker, R.B. and Tricker, R.I., 2015. Corporate governance: Principles, policies, and
practices. Oxford University Press, USA.