Analysis of SAIC Motor Stock Using CAPM: Financial Economics Report

This report provides a financial analysis of SAIC Motor stock, a major automobile company in China. It begins with an overview of the company, its market position, and its financial performance, including sales figures and its ranking on the Fortune Global 500 list. The core of the report focuses on applying the Capital Asset Pricing Model (CAPM) to assess the stock's risk and potential return. The report calculates portfolio risk and return metrics and uses the CAPM formula to determine the expected return on investment. The analysis considers the time value of money and the impact of risk, providing insights into whether the stock is a worthwhile investment. Based on the analysis, the report offers a recommendation to investors, particularly those with diversified portfolios and a moderate risk tolerance, suggesting that SAIC Motor stock could be a good investment due to its lower volatility and potential for returns.

“Financial Economics” Words: 1350

Table of Contents
1 Capital Asset Pricing Model.....................................................................................................3
2 Analysis of the Company’s Stock............................................................................................4
2.1 Overview of the company..................................................................................................4
2.2 Analysis of the SAIC Motor...............................................................................................4
3 Recommendation to the investor..............................................................................................6
References........................................................................................................................................7

1 Capital Asset Pricing Model
The capital asset pricing model is a common method which is used to analyse the return on a
portfolio of any company. It can be defined as the model which is used to identify the
relationship between systematic risk and expected return which is attached to the stocks of a
company. It is a common tool which is used by a number of investors for the purpose of
identification that is it feasible to invest in the stocks of a certain company or not (Zabarankin,
Pavlikov and Uryasev, 2014). The formula of the CAPM is,
E (Ri) = RF + βi (E (RM) − RF)
Equation 1: CAPM
Where RF= risk free rate
RM=Expected market return and
βi= beta of the investment
CAPM is useful as it covers two main aspects of the investment which is a great deal for the
investors. These aspects are time value of money and risk. The risk free rate in the CAPM
defines the impact of time value of money on the stock and identifies that how much earnings
will an investors be getting in the while period of the investment (Zabarankin et al, 2014). The
impact of risk is also involved in the CAPM which shows that how much amount will be
required by an investor for the compensation of additional risk. Beta is the model represents the
riskiness of the stock in comparison with the whole market. For the universal acceptance of the
CAPM, there are certain assumptions which are necessarily taken into consideration (Arnold,
2013).
 It is assumed that all investors want to maximize the economic earnings.
 They all are rational decision maker and are reluctant to the risks.
 They are price takers and they do not have ability to bargain.
 The market is frictionless.
 All the investors have homogeneous expectations
 It is also assumed that all the investors have same information at the same time.

2 Analysis of the Company’s Stock
2.1 Overview of the company
SAIC Motors is listed in the Shanghai Stock exchange and established its business in China in
early 1940s. The company is known as the biggest automobile company in China having market
equity of 11 billion shares. It trades in the China’s A share market as it is the market leader of the
industry. The business of the SAIC mainly covers the research, production and sales of motor
vehicles on personal and commercial basis. The automobiles are manufactured from the scratch
in the company. There are also some other companies which are associated with the SAIC Motor
and they are Morris Garages, SAIC MAXUS, SAIC Volkswagen, SAIC-GM, Shanghai General
Motors Wuling, NAVECO, SAIC-IVECO Hongyan and Shanghai Sunwin Bus Corp (SAIC
Motor, 2016).
The operating income of the company mainly depends upon the sales of the vehicle and in the
past few years, SAIC Motor has experienced consistent growth in its income which indicates that
the performance of the products of the company is good. In 2015, company’s sales reached 5,902
million units which are 5% more as compare to the year 2014. It is also listed in the annual
fortune global 500 list at number 46th while showing revenue of $106.68 billion. It is also the
12th time for the SAIC Motor to gain a position in the most powerful companies of the world.
The SAIC Motor is consistently working on improving its products so that the level of the
satisfaction of customer increases and the position of the company in the market remains stable
(Annual Report, 2015).
2.2 Analysis of the SAIC Motor
Portfolio Return and Risk
The calculation of risk and return of the portfolio of SAIC Motor can be seen in the table 1 as
follows.
Dollar amount of asset $ 511,631
Dollar amount of portfolio $ 175,129
Return on asset 45%
Portfolio Return 1.31
Portfolio Risk 0.76
Table 1: Portfolio risk and return

In table 1, it can be seen that the return of the portfolio is much better as compare to the risk
involved. The return on the portfolio is calculated by dividing the dollar amount of asset by
dollar amount of portfolio and then multiplies it with the return on asset. The result shows that on
a single stock of the company, the return of $1.31 will be observed. The risk which is involved
with the portfolio is 0.76 which is known as beta. It shows that if the stock of the SAIC Motor is
bought than the overall risk which will be calculated is 0.76 on a single investment. It is less than
1 which shows that the stock of the company is less volatile as compare to the market. However,
for calculating the actual return which will be resulting from the buying of the stock of SAIC
Motor can be calculated by using the Capital asset pricing model. It will be helpful for the
reliable analysis as the capital asset pricing model gives a picture of the investment of the
company with respect to the whole market. Therefore, it is necessary for the efficient analysis
that the capital asset pricing model should be considered otherwise the end results can mislead
the investors and they may suffer loss at the end of the investment period.
Capital Asset Pricing Model (CAPM)
The calculations for the Capital asset pricing model of the stock of SAIC Motor can be seen in
the table 2 as follows.
Expected market return 1.31
Beta 0.76
Risk free rate 0.6
Expected return on investment 1.14
Table 2: Capital Asset Pricing Model
It can be seen in the table 2 that the expected return is 1.14 on the investment which is less than
the expected market return. However, the difference is not much bigger so the decision can be
made by an investor to accept the investment in the stocks of SAIC Motor. The answer of capital
asset pricing model (CAPM) also indicates that the single stock of the investment will give a
return of $1.14 to the investors considering the concept of the time value of money. The time
value of money is important as the value of currency declines with the passage of time and the
more returns will be expected by the investors to compensate the decline in the earnings. The
risk impact is also highlighted in the calculation which means that the answer of the return

involves the impact of risk also and the investor will get this sum of amount after the deductions
of all the risks and market volatility involved with the asset. Therefore, it is recommended to use
the capital asset pricing model for the better results about the investment.
3 Recommendation to the investor
It is recommended to the investors who has a diversified portfolio and also aged in the late fifties
that the investment in the stocks of the SAIC Motor is good decision as the company is less
volatile to the risk which is also indicated from its beta as it is less than 1. An investor who has a
diversified portfolio is a less risk taker which means that a little risk will cause a lot of negativity
in the portfolio. The risk which is involved in the company is very low which makes it best for
the investors who is less risk taker as the earnings will also be good. The capital asset pricing
model shows that at the end of the investment period, the investor will get a return of $1.14 on a
single stock which shows that the 14% excess return will be enjoyed by the investors if he/she
decided to invest in the company’s stock. The returns which are provided by the other securities
which are involved in the diversified portfolio also provide a good return. However, the stock of
the company is less volatile as compare to the other equities which are present for the investment
because there is assurance by the company that in case of any loss, the company will return the
amount of money to the investors and they will not lose it in case of the company’s liquidation.
Therefore, it is recommended to invest in the company’s stock.

References
Annual Report (2015). “Annual report of SAIC Motors, 2015” [Online] Available at <
http://www.saicmotor.com/english/images/investor_relations/annual_report/
2016/6/7/1C117E345F254379966260F97C5D9353.pdf> [Accessed: 7th December, 2016]
Arnold, G. (2013). ”Financial Times Handbook of Corporate Finance: A Business Companion to
Financial Markets, Decisions and Techniques”. UK: Pearson.
SAIC Motor (2016). “SAIC Motor” [Online] Available at <
http://www.saicmotor.com/english/company_profile/about_us/index.shtml> [Accessed:
7th December, 2016]
Zabarankin, M., Pavlikov, K. and Uryasev, S. (2014). Capital asset pricing model (CAPM) with
drawdown measure. European Journal of Operational Research, 234(2), pp.508-517.