ACC515 Finance: Investment Analysis, Portfolio Construction Solution

This assignment solution covers key concepts in finance, including the calculation of present value of cash flows, holding period return (HPR) for stocks like NAB and BHP relative to the market, and the application of the Capital Asset Pricing Model (CAPM). It analyzes monthly data to determine HPR, annual HPR, and standard deviation as a measure of risk. The solution includes graphical representations of risk versus return for NAB, BHP, and the market, as well as security market lines. Finally, it constructs a portfolio of NAB and BHP, calculates the estimated return, and provides a recommendation based on risk and return considerations. The analysis uses data extracted from Yahoo Finance and references relevant financial management theories.

1
Solution 2:
Answer 2.i:
TimeLine
% 8% 6%
Year 0 1 2 3 4 5
Answer 2.ii:
Formula to calculate the Present value of cash flows
Present value at Time 1
Year Time Cash Flows Interest Rate PVF
0 0 8%
0 1 0 8% 1.000
Present Value at Time 5
Present Value at Time 10
0 0 8%
(Brigham & Michael, 2013)

2
Solution to Question 4:
Answer i:
Formula of Holding Period Return (HPR):
Date Closing Price Question:I Holding Peroid Return
NAB BHP Market NAB BHP Market Portfolio
12/31/2015 26.69 21.91 4154.30
1/31/2016 24.19 22.61 4040.10 -9.37% 3.19% -2.75% -0.57%
2/29/2016 26.24 25.90 4207.30 8.47% 14.55% 4.14% 12.73%
3/31/2016 27.19 31.34 4348.00 3.62% 21.00% 3.34% 15.79%
4/30/2016 27.15 26.97 4448.30 -0.15% -13.94% 2.31% -9.80%
5/31/2016 25.43 28.56 4323.80 -6.34% 5.90% -2.80% 2.23%
6/30/2016 26.54 29.69 4588.50 4.36% 3.96% 6.12% 4.08%
7/31/2016 27.34 30.00 4479.80 3.01% 1.04% -2.37% 1.64%
8/31/2016 27.87 34.65 4480.60 1.94% 15.50% 0.02% 11.43%
9/30/2016 28.00 35.02 4395.60 0.47% 1.07% -1.90% 0.89%
10/31/2016 28.93 37.54 4506.70 3.32% 7.20% 2.53% 6.03%
11/30/2016 29.70 35.78 4695.80 2.66% -4.69% 4.20% -2.48%
0
-20.0
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
HPR
(Monthly Data for NAB, BHP and Market has been exacted from Yahoo Finance and references
for same can be found in reference section)
(References: Yahoo finance: NAB, 2018, Yahoo finance: BHP, 2018 and Yahoo finance:
ASX100, 2018)
Graph for holding period returns

3
01/01/2016
01/02/2016
01/03/2016
01/04/2016
01/05/2016
01/06/2016
01/07/2016
01/08/2016
01/09/2016
01/10/2016
01/11/2016
01/12/2016
-20.00%
-15.00%
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
Holding Peroid Returns
NAB
BHP
Market
Time
HPR
Answer ii to iv:
Formula of Annual Holding Period Return (HPR):
Formula of Standard Deviation:
3/31/2016 27.19 31.34 4348.00 3.62% 21.00% 3.34%
4/30/2016 27.15 26.97 4448.30 -0.15% -13.94% 2.31%
5/31/2016 25.43 28.56 4323.80 -6.34% 5.90% -2.80%
6/30/2016 26.54 29.69 4588.50 4.36% 3.96% 6.12%
Answer v:
Graph plot where risk is on X axis and return on Y axis for each of NAB, BHP and Market

4
0 2 4 6 8 10 12
0.00%
200.00%
400.00%
600.00%
800.00%
1000.00%
1200.00%
f(x) = NaN x + NaN
R² = 0 NAB
NAB
Linear (NAB)
Risk
Annual HPR
0 2 4 6 8 10 12
0.00%
200.00%
400.00%
600.00%
800.00%
1000.00%
1200.00%
f(x) = NaN x + NaN
R² = 0 BHP
BHP
Linear (BHP)
Risk
Annual HPR
0 2 4 6 8 10 12
0.00%
200.00%
400.00%
600.00%
800.00%
1000.00%
1200.00%
f(x) = NaN x + NaN
R² = 0 Market
Series1
Linear (Series1)
Risk
Annual HPR

5
Answer to vi:
Formula of CAPM:
(Moles & Kidwekk, 2011)
Application of CAPM Model
NAB BHP
Risk Free Rate 2.95% 2.95%
Market Return 6.50% 6.50%
Beta 1.23 0.9
Expected return when beta = 0 2.95% 2.95%
Expected Return on given beta 7.32% 6.15%
Answer to vii:
0.8 1 1.2 1.4 1.6 1.8 2 2.2
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
f(x) = − 0.0886217765660425 x + 0.225002443482491
R² = 1
NAB
NAB
Linear (NAB)
Risk
Annual HPR

6
0 0.2 0.4 0.6 0.8 1 1.2 1.4
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
NAB Security Market Line
Series2
Linear (Series2)
Linear (Series2)
BEta
Return
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
BHP Security Market Line
Series2
Linear (Series2)
Linear (Series2)
Beta
Return
Answer viii:
Portfolio of NAB (30%) and BHP (70%)
Construction of Portfolio

7
Date Closing Price Question:I Holding Peroid Return
NAB BHP Market NAB BHP Market Portfolio
12/31/2015 26.69 21.91 4154.30
1/31/2016 24.19 22.61 4040.10 -9.37% 3.19% -2.75% -0.57%
2/29/2016 26.24 25.90 4207.30 8.47% 14.55% 4.14% 12.73%
3/31/2016 27.19 31.34 4348.00 3.62% 21.00% 3.34% 15.79%
4/30/2016 27.15 26.97 4448.30 -0.15% -13.94% 2.31% -9.80%
5/31/2016 25.43 28.56 4323.80 -6.34% 5.90% -2.80% 2.23%
6/30/2016 26.54 29.69 4588.50 4.36% 3.96% 6.12% 4.08%
7/31/2016 27.34 30.00 4479.80 3.01% 1.04% -2.37% 1.64%
8/31/2016 27.87 34.65 4480.60 1.94% 15.50% 0.02% 11.43%
9/30/2016 28.00 35.02 4395.60 0.47% 1.07% -1.90% 0.89%
10/31/2016 28.93 37.54 4506.70 3.32% 7.20% 2.53% 6.03%
11/30/2016 29.70 35.78 4695.80 2.66% -4.69% 4.20% -2.48%
0
-20.0
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
HPR
Formula to calculate the estimated return of portfolio:
(Bromwich & Bhimani, 2005)
Expected Return 0
Expected Return 0.9
Answer ix:
According to results gathered above I would like invest in Portfolio as it provides average
return with lower risk.

8
References
Yahoo finance: ASX100. (2018). Historical Data. Retrieved on 8 April 2018, from
https://au.finance.yahoo.com/quote/%5EATOI/history?p=%5EATOI
Brigham, F., & Michael C. (2013). Financial management: Theory & practice. Cengage
Learning.
Bromwich, M. & Bhimani, A., (2005). Management accounting: Pathways to progress. Cima
publishing.
Moles, P. & Kidwekk, D. (2011). Corporate finance. John Wiley &sons.
Yahoo finance: NAB. (2018). Historical Data. Retrieved on 8 April 2018, from
https://au.finance.yahoo.com/quote/NAB.AX/history?p=NAB.AX
Yahoo finance: BHP. (2018). Historical Data. Retrieved on 8 April 2018, from
https://finance.yahoo.com/quote/BHP/history?p=BHP