Solution to Part-1
Answer to Part-a
The average returns on shares of each company along-with the average return on the market
ASX200 is shown below
ASX200
Average Monthly Returns
0.104
AMP.AX
(0.061)
ANZ.AX
0.074
CBA.AX
0.184
NAB.AX
QAN.AX
0.089
2.107
From the above monthly returns, it can be observed that the market on an average yielded .104%
monthly returns over the said period. During the same period, CBA and QAN significantly
outperformed the market where-as the performance of AMP, ANZ and NAB were below the
market returns with AMP actually giving out a negative return.
Answer to Part-b
When an equally weighted portfolio is created then 20% of the total investment amount is
invested in each of the 5 securities. The average return on such a portfolio is 0.4787 (47.87%)
Average return on equally weighted portfolio
= (0.20*-.061%) + (0.20*0.074%) + (0.20*0.184%) + (0.20*0.089%) + (0.20*2.107%)
= 0.4787%
The evolution of returns over time for each of the stocks, the market and the portfolio can be
depicted graphically as shown below
Solution to Part-2
Answer to Part-a
The standard deviation of returns for each of the five companies is shown below
ASX200
Standard Deviation
3.252
AMP.AX
6.315
ANZ.AX
5.869
CBA.AX
5.578
NAB.AX
QAN.AX
5.150
9.126
Standard Deviation measures the overall riskiness of a security. From the above standard
deviation, it can be seen that out of the 5 stocks analyzed, QAN has the highest associated risk
followed by AMP. The riskiness for the all other three stocks are somewhat similar with minor
deviations
Answer to Part-b
The standard deviation of the equally weighted portfolio is 4.614 which is the lowest as
compared to the individual standard deviation of each of these 5 shares. This can be attributed to
the benefit of diversification which states that a portfolio risk will be somewhat lower than the
individual risks. As individual stocks are added to a portfolio the overall riskiness changes
depending on the individual riskiness of stocks
Answer to Part-c
The standard deviation of returns for the market ASX 200 is 3.252 where-as that of the equally
weighted portfolio is 4.614. The standard deviation of the market is lower because there are
company specific risks which are inherent to each company’s shares in addition to the market
risk which influences the risk of individual shares which in turn influences the overall portfolio
risk. Generally speaking, portfolio risks or individual stock’s risk will always be greater than that
of the market.
Solution to Part-3
Answer to Part-a
The Beta coefficient of each of the five companies is shown below
ASX200
Beta Coefficient
1.000
AMP.AX
0.417
ANZ.AX
0.404
CBA.AX
0.420
NAB.AX
0.441
QAN.AX
0.092
Answer to Part-b
Beta coefficient measures the volatility of the stock or the riskiness of the stock relative to the
market. The share prices of each company is influenced by host of factors including company
specific factors like earnings, announcements, news, events or corporate actions which varies
across companies and hence the beta coefficients of each company varies
Solution to Part-4
Answer to Part-a
INTRODUCTION
The monthly stock price movement for the five companies – AMP Ltd., ANZ Bank,
Commonwealth Bank of Australia, National Australia Bank and Qantas Airways has been
analyzed in order to understand their performance and associated risk for evaluating potential
investment options.
RETURN EVALUATION
The average monthly returns for each of the five companies is shown below which has been
calculated using the month end adjusted closing prices from January 2015-December 2017
Out of the five companies analyzed, it can be seen that CBA and QAN has clearly outperformed
the market with Qantas Airways being the top performer. The other three firms have yielded a
return lower to the overall market with AMP giving out negative returns.
RISK ASSESSMENT
The associated risks with the share price of each of the five companies can be measures using
standard deviation as well as Beta coefficient. The standard deviation and the beta coefficient for
the companies analyzed is shown in the snapshot below
ASX200
Standard Deviation
Beta Coefficient
3.252
1.00
AMP.AX ($A) ANZ.AX ($A) CBA.AX ($A) NAB.AX($A) QAN.AX ($A)
6.315
0.42
5.869
0.40
5.578
0.42
5.150
0.44
9.126
0.09
Risk and Returns always moves in the same direction i.e. higher the risk higher the return
because an investor will only invest in a high risk security when the associated return is higher
and vice versa. The same can be observed from the risk-return assessment of these five
companies – Qantas Airways has the higher associated risk as measured by standard deviation
followed by AMP Ltd. However, the market risk as measured by Beta coefficient is the lowest
for Qantas where-as it is highest for NAB. The beta coefficient measures the volatility of the
stock price and it explains the percentage change in the stock price with 1 unit change in the
market index. Overall, Qantas is seen to be the most risky and NAB is the least risky of these
five companies.
PRICING ANALYSIS
In order to analyze the correctness of the prevailing market prices of stocks, it is prudent to
analyze the expected and required return of the share prices. The expected and required return for
each of the five companies is shown below
ASX200
Expected Return
Required Return
0.524
0.524
AMP.AX
(5.051)
0.292
ANZ.AX
0.872
0.286
CBA.AX
(0.354)
0.293
NAB.AX
QAN.AX
0.049
0.301
4.841
0.162
As per the general rule of thumb, if the required rate of return is higher than the expected return
then the stock is said to be overvalued and if the required rate is lower than the expected return
then the shares are under-valued. From the above snapshot, it can be observed that the required
return for AMP, CBA and NAB are higher which means that the share prices of these three
companies are over-valued where-as the prices of ANZ and QAN are under-valued.
CONCLUSION and RECOMMENDATION
Based on the risk-return analysis carried out above, it can be concluded that QANTAS and AMP
are the riskiest stocks of which AMP has been a clear under-performer over the last two years.
Further, the shares of AMP, CBA and NAD are over-valued and does not really qualify a good
investment opportunity given it is already highly priced where-as ANZ and QAN are underpriced as well as has performed well over the last two years. In addition, the June 2018 forecast
also suggests that ANZ and QAN are expected to yield positive returns.
Given the assessment, ANZ and QAN seems to be good investment opportunity from a mediumto-long term perspective and is expected to generated wealth for its investors. However, in order
to make an informed investment decision, other factors affecting the company’s performance
should also be analyzed and a portfolio evaluation should also be carried out to ensure that risk is
getting diversified.
Answer to Part-b
In order to diversify the overall risk, an equally weighted portfolio can be constructed. The
average monthly return of the equally weighted portfolio so created is 0.4787% with a forecast
return of 0.07%. Further, the risk as measured by standard deviation for this portfolio is 4.614
with a measured beta of 0.591. Based on this risk-return assessment, it can be concluded that the
risk considerably reduces for an equally weighted portfolio with a return which is positive and
higher than most of the five companies being analyzed. Thus, keeping in mind the risk-return
trade off, it is recommended to invest in an equally weighted portfolio which would help the
investor in lowering the risk and generating positive returns.