Trident University: Module 1 SLP - Tesla Stock Risk Analysis Report

This report provides a comprehensive financial analysis of Tesla, Inc. (TSLA), focusing on its risk characteristics and comparing them to those of its competitors in the automotive industry. The analysis begins with an introduction to Tesla, highlighting its business segments, innovations, and the...Read More

Module 1 – Case

1.
A. Solution:
Annual funds required as a perpetuity payment = $50,000
Interest rate = 5%
Amount needed to fund this perpetuity to guarantee the charity a payment of
$50,000/year = Present value of this perpetuity
= Annual Perpetuity payment / Interest rate
= 50,000 / 0.05
= 1,000,000
Answer is $1,000,000.
B. Solution:
Amount that we have decided to put in bank account = $1,000 (Present
Value)
Time period = 10 years (Number of periods)
Interest rate = 1% (Continuous compounding rate)
Also, given that we don’t plan to withdraw any money for this time period.
The value of this bank account in 10 years = Present value * exp (interest rate
* number of periods in years)
= 1000 * exp (0.01 * 10)
= 1105.170918
Answer is $1,105.17.
2.
A. Solution:
Details are in Excel in worksheet named Question 2. Following table shows
the final results:

Solutio
n:
Interest
Rate = 8%
Year Payme
nt
Present
Value
Future
Value
1 5000 4629.6296
3
6802.444
8
2 6000 5144.0329
22 7558.272
3 7000 5556.8256
87 8164.8
4 8000 5880.2388
22 8640
5 9000 6125.2487
73 9000
Total 27335.975
8
40165.51
68
So, the present value of lottery ticket
=27,335.98 and the future value of lottery
ticket = 40,165.52
B. Solution:
Details are in Excel in worksheet named Question 2. Following table shows
the final results:
Solutio
n:
Interest
Rate = 10%

Year Payme
nt
Present
Value
Future
Value
1 5000 4545.45454
5 7320.5
2 6000 4958.67768
6 7986
3 7000 5259.20360
6 8470
4 8000 5464.10764
3 8800
5 9000 5588.29190
8 9000
Total 25815.7354 41576.500
0
So, the present value of lottery ticket =
25,815.74 and the future value of lottery
ticket = 41,576.50
3.
A. Solution:
Details are in Excel in worksheet named Question 3. Following table shows
the final results:
Asset A Asset B Asset C
Probability Return Probability Return Probability Return
0.3 5 0.1 25 0.1 4
0.4 8 0.3 20 0.8 5
0.3 9 0.5 15 0.1 6
0.1 14
Expected Return 7.4 Expected Return 16 Expected Return 5

B. Solution:
Details are in Excel in worksheet named Question 3. Following table shows
the final results:
Asset A Asset B Asset C
Probability Return Probability Return Probability Return
0.3 5 0.1 25 0.1 4
0.4 8 0.3 20 0.8 5
0.3 9 0.5 15 0.1 6
0.1 14
Standard
deviation
1.62480
8
Standard
deviation
3.66060
1
Standard
deviation
0.44721
4
C. Solution:
Details are in Excel in worksheet named Question 3. Following table shows
the final results:
Asset A Asset B Asset C
Probability Return Probability Return Probability Return
0.3 5 0.1 25 0.1 4
0.4 8 0.3 20 0.8 5
0.3 9 0.5 15 0.1 6
0.1 14
Coefficient of
variation
21.9568
6
Coefficient of
variation
22.8787
6
Coefficient of
variation
8.94427
2

D. Solution:
Total Risk = Standard deviation of the asset
Relative Risk = Coefficient of variation of the asset
Asset B has the highest total risk and it is equal
to 3.660601
Asset B has the highest relative risk and it is
equal to 22.87876
4.
A. Solution:
By CAPM, Required return for this stock = Risk free rate + Beta of the
stock * (Market Return – Risk free rate)
= 1 + 1.2*(8-1)
= 9.4
So, the required return for this stock = 9.4%
B. Solution:
New Beta = old beta * 1.5 = 1.2 * 1.5 = 1.8
By CAPM, Required return for this stock = Risk free rate + Beta of the
stock * (Market Return – Risk free rate)
= 1 + 1.8*(8-1)
= 13.6
So, the new required return for this stock = 13.6%
Percentage-wise change in required return compared to answer in above
part A =

[(the new required return for this stock – the old required return for this
stock) / (the old required return for this stock)] * 100
= [ (13.6 – 9.4) / (9.4)] * 100
= 44.68085%
So, Percentage-wise change in required return compared to answer
in above part A = 44.68%
C. Solution:
New market return = old market return * 1.5 = 8 * 1.5 = 12
By CAPM, Required return for this stock = Risk free rate + Beta of the
stock * (Market Return – Risk free rate)
= 1 + 1.2*(12-1)
= 14.2
So, the new required return for this stock = 14.2%.
Percentage-wise change in required return compared to answer in above
part A =
[(the new required return for this stock – the old required return for this
stock) / (the old required return for this stock)] * 100
= [ (14.2 – 9.4) / (9.4)] * 100
= 51.0638%
So, Percentage-wise change in required return compared to answer
in above part A = 51.06%.
5. Solution:
Beta is the relative riskiness of the stock to the market. In other words, it tells us
that how volatile is the stock in comparison to the market (Vishwanath, 2007). It is
slope coefficient achieved on regressing the historical stock returns on market

returns. Another formula of beta is Correlation between stock and market
multiplied by the standard deviation of stock and divided by the standard
deviation of the market.
It is given that Trendy Tech Inc. has “fair-weather friends” investor. This makes
Trendy Tech Inc. more volatile than the market as when the stock market is going
up, everybody wants to invest in Trendy Tech that lead to higher relative increase
in the price of this stock. So, it will give higher return in this scenario as compared
to the market. But as soon as the market goes down everyone jumps ships and
sells their shares that lead to higher relative decrease in the price of this stock.
So, it will give higher negative return or more loss in this scenario as compared to
the market.
So, Trendy Tech Inc. is the company that would have the highest beta.
It is given that Oily’s stock price seems to depend only on the price of oil and
nothing else. So, the correlation between the Oily’s stock return and market
return will be very low. This will lead to a lower beta.
So, Oily Oil Inc. is the company that would have the lowest beta.
It is given that Conglomerated Conglomerate Inc. is a giant company with
holdings in almost every imaginable industry. As this company’s stock will have
similar characteristics to that of a diversified portfolio or an index. So, the overall
price movement of this company would be similar to that of the market and its
beta will be close to market beta of 1.
So, Conglomerated Conglomerate Inc. is the company that would have a
beta closet to 1.
References:
Vishwanath, S. (2007). Chapter 3: Risk and return. In Corporate finance: Theory and
practice. SAGE Publications India.

Trident University
Student’s Name
Module 1 – SLP
Course Number: Course Name

Professor’s Name
Date
Contents
1. Introduction...........................................................................................................11
2. Tesla, Inc. (TSLA) Risk Analysis.........................................................................11
2.1. Tesla’s description and its interesting details.........................................11
2.2. Tesla’s beta and its risk characteristics...................................................11
2.3. Tesla’s stock price movements and its overall riskiness.......................12
2.4. Comparison of Tesla with its competitors in terms of beta and other
riskiness measures to choose a preferred company for investment..............13
3. Conclusion..........................................................................................................14
4. References:.........................................................................................................14
5. Appendix.............................................................................................................15

1. Introduction
The paper analyses the risk characteristics of Tesla stock using the systematic risk
measure, beta and total risk measure, standard deviation. It compares these risk
measures of Tesla with that of its competitors in the same industry. Finally, the paper
recommends the investment in Tesla or its competitors based on this risk return
analysis.
2. Tesla, Inc. (TSLA) Risk Analysis.
2.1. Tesla’s description and its interesting details.
Tesla, Inc. is a US based electric-vehicle and clean-energy firm with its headquarters
in Palo Alto, California. It was founded in 2003 by a Martin Eberhard and Marc
Tarpenning with a dream of manufacturing electric vehicles that are better than
gasoline driven cars in term of looks and performance. Two segments in which the
firm operates are Automotive segment and Energy generation & storage segment.
The Automotive segment is in the business of designing, developing, manufacturing
and selling electric-vehicles. The Energy generation & storage segment is in the
business of designing, manufacturing, installing, and selling/leasing of solar energy
systems and energy storage products for use in commercial places, residential
places and utility sites (Tesla, n.d.).

I find Tesla interesting due to its focus on sustainability and innovation. I admire its
electric vehicles particularly Model X and Model S that are among the cars with
fastest acceleration. These vehicles have great performance and advanced features
alongside the environmental advantages because of no emission. The amazing thing
about Tesla is that it is more like a software company as their cars are updated
quickly to include new features because to their advanced technological capabilities.
Also, I really like Tesla’s CEO Elon Musk because of his agenda of a sustainable
future. He advocates the use of the clean energy and innovative products to address
the existing issue of the carbon crisis. To promote the advent of sustainable
transport, Tesla had made all its patents free to use for anyone. So, I have chosen
Tesla for this analysis as I like its awesome electric cars and its vision of a better and
more sustainable future.
2.2. Tesla’s beta and its risk characteristics.
Beta of Tesla based on 5-year monthly return = 0.73 (Yahoo Finance, n.d.).
Beta measures the volatility of the stock in comparison to the market. It tells us that
how risky the stock is relative to the overall market. Beta equal to one means that the
stock moves with the market. Beta lower than one means that the stock is less
volatile than the market. Beta greater than one means that the stock is more volatile
than the market (Vishwanath, 2007). Based on the beta of 0.73, Tesla appears to
have low risk. It means that this stock is less volatile than the market. So, if the
market declines by 10% then Tesla stock will decline by 7.3% that is less as
compared to the market.
2.3. Tesla’s stock price movements and its overall riskiness.
On analyzing the movement of the Tesla’s stock, it is observed that the highest price
the stock has been over the last year is 917.42 (Google Finance, 2020) and the
lowest price of the stock over the last year is 178.97 (Google Finance, 2020). The
five-year pattern of the Tesla stock’s movement is shown below (Google Finance,
2020):

Volatility of the stock can be observed from the changes in stock prices over a
particular period. If the stock moves up and down a lot then it is a volatile or a risky in
nature. As noted above the highest price of Tesla in the last one year was 917.42
and the lowest price was 178.97. Its recent price is 573.00. So, It can be observed
that the overall volatility or the riskiness of Tesla was high as there was lot of
dispersion in its price movement. That increases the riskiness of the investment as
there is higher probability of prices to decline by high margin over the investment
period due to overall higher dispersion.
2.4. Comparison of Tesla with its competitors in terms of beta and other
riskiness measures to choose a preferred company for investment.
Some other companies in the automobiles industry that are the competitors od Tesla
are General Motors Company, Ford Motor Company, BMW and Volkswagen. These
companies also manufacture and sells transport vehicles and many of these also
have electric vehicle division.
General Motors Company (GM) has beta of 1.51 based on 5-year monthly return
(Yahoo Finance, n.d.). This beta is greater than the beta of Tesla. So, GM is more
volatile as compared to Tesla relative to the market.
Ford Motor Company (F) has beta of 1.36 based on 5-year monthly return (Yahoo
Finance, n.d.). This beta is greater than the beta of Tesla. So, Ford is more volatile
as compared to Tesla relative to the market.
Bayerische Motoren Werke Aktiengesellschaft (BMW.DE) has beta of 1.30 based on
5-year monthly return (Yahoo Finance, n.d.). This beta is greater than the beta of
Tesla. So, BMW is more volatile as compared to Tesla relative to the market.

Volkswagen AG (VOW3.DE) has beta of 1.63 based on 5-year monthly return
(Yahoo Finance, n.d.). This beta is greater than the beta of Tesla. So, Volkswagen is
more volatile as compared to Tesla relative to the market.
Average beta of these four companies = (1.51 + 1.36 + 1.30 + 1.63) / 4 = 1.45.
Compared to this beta of Tesla (0.73) is quite lower. So, Tesla was less volatile
relative to the market as compared to volatility of the industry.
The following table shows the annual standard deviation of the returns of Tesla and
all other stocks. It tells us about the overall dispersion in the movement of these
respective stocks. It is observed that overall dispersion was higher in case of Tesla.
Annual Standard deviation (considering 250 trading days)
TSLA GM F BMW VOW3
73.27% 49.71% 46.42% 36.64% 43.90%
The risk-reward of these stocks can be measured by the Sharpe ratio that tells us
about the return in excess of the risk-free rate per unit of the overall risk take
(Vishwanath, 2007). Following table shows the Sharpe ratio of these stocks
(calculations are shown in the excel in work sheet named SLP attached in the
appendix):
Sharpe ratio = (Return - Risk free rate / Standard deviation)
TSLA GM F BMW VOW3
2.29 -0.70 -0.90 -0.78 -0.29
Tesla has the highest Sharpe ratio equal to 2.29 that means it has the highest risk to
reward ratio.
So, it is preferred to invest in Tesla due to its low systematic risk given by the lower
beta and its higher overall return to risk ratio given by the high Sharpe ratio in
comparison to the other companies.

3. Conclusion
The analysis of the risk characteristics of Tesla has shown that the stock is less
volatile relative to the market because of its lower beta. But its overall dispersion
given by the standard deviation is higher as compared to other stocks in the same
industry. If, we consider the overall risk-return ratio given by the Sharpe ratio it is
seen that Tesla has higher return in excess of risk-free rate per unit of overall risk
taken. So, it is preferred to invest in Tesla as compared to its competitors.
4. References:
Vishwanath, S. (2007). Chapter 3: Risk and return. In Corporate finance: Theory and
practice. SAGE Publications India.
Tesla. (n.d.). About Tesla. Retrieved April 11, 2020, from:
https://www.tesla.com/about.
Yahoo Finance. (n.d.). Tesla, Inc. Retrieved April 11, 2020, from:
https://finance.yahoo.com/quote/TSLA/.
Google Finance. (2020). Tesla Inc. Retrieved April 11, 2020, from:
https://www.google.com/search?
q=tesla+stock&sxsrf=ALeKk018X6NA_fId7JelECQIGWsG9EVv0Q:15866424
75300&source=lnms&tbm=fin&sa=X&ved=2ahUKEwjWt4Dpr-
HoAhVM7HMBHS4cBPIQ_AUoAXoECBkQAw&biw=1366&bih=657#scso=_L
T6SXpegJ7bez7sP49eQwAU1:0.
Yahoo Finance. (n.d.). General Motors Company. Retrieved April 11, 2020, from:
https://finance.yahoo.com/quote/GM?p=GM&.tsrc=fin-srch.
Yahoo Finance. (n.d.). Ford Motor Company. Retrieved April 11, 2020, from:
https://finance.yahoo.com/quote/F?p=F&.tsrc=fin-srch.
Yahoo Finance. (n.d.). Bayerische Motoren Werke Aktiengesellschaft. Retrieved
April 11, 2020, from: https://finance.yahoo.com/quote/BMW.DE?
p=BMW.DE&.tsrc=fin-srch.
Yahoo Finance. (n.d.). Volkswagen AG. Retrieved April 11, 2020, from:
https://finance.yahoo.com/quote/VOW3.DE?p=VOW3.DE&.tsrc=fin-srch.

5. Appendix