Assignment 2 Example | Topics and Well Written Essays - 2000 words

2 - Assignment Example The company owns over 7 million hectares of land across the Northern Territory and Queensland. The company’s strategy is to operate in diversified agribusiness operations and bring innovation in existing business practices in order to achieve long term gains. ActivEX Limited is an Australian mineral and exploration company that specialises in identifying, acquiring, and distribution of minerals. The company aims to increase shareholders’ value by investing into quality projects including minerals such as gold, copper, cobalt, etc. The company is involved in activities such as drilling, soil testing and mapping, data compilation, and reviewing. Adcorp Australia is a leading advertising agency owned locally and offers services including branding, advertising, creative design, event management, media planning and promotions. a) The monthly returns of the three companies are calculated using the following formula: Monthly return = (Current adjusted close price/Previous adju sted close price) – 1 The historical prices of the three companies are obtained from Yahoo Finance and the individual monthly returns of the three chosen stocks are shown in the appendices section. The period under study was for 61 months ending on Dec 31, 2012. The calculations are made in the MS-Excel spreadsheet application using the above formula to calculate monthly returns. Then the average monthly return is calculated using the Excel function AVERAGE that computes the average of given numbers. The standard deviations of adjusted closing prices are calculated using the STDEV function of MS-Excel. Standard deviation is the measure of risk of investment which measures the stock volatility over a given period of time. The expected return from the stock is calculated using the CAPM (Capital Asset Pricing Model) approach, where there is the concept of Beta. From the above summarised risk-return analysis, it can be said that the returns of all the three stocks are equal since beta is very close to zero but it is positive. This means that investment in either of the companies is safe as it is apparent that the standard deviation of market index (AORD) is more volatile than the chosen stocks. From the theory of risk-return, it can be said that the higher the risk, the higher would be potential return. This is true in case of AORD since the risk borne by the investor must be compensated by higher expected returns. When the individual stocks of the companies are compared to AORD, it can be said that all the three stocks have lower standard deviation or risk associated with investment. This would alternatively mean that the returns from these stocks would be lower due to less associated risk. This can be verified from the expected return that calculates the estimated return from the stock using CAPM. In this study it was found that expected return of AORD was higher than the three chosen stocks due to a higher risk. Also, for the given return, the rational i nvestor would select the stock that is least risky and in this study riskiness of investment is determined using standard deviation. A higher value of standard deviation means that the stock is more risky and vice versa. From the above table, it can be said that Activex Limited is the least risky (the lowest standard deviation among other two stocks) and Australian Agriculture Co. Ltd is the riskiest (the highest standard deviation among other two stocks). b) In order to estimate the beta for each of three chosen