Assessment 2: Report (20%)

A, B, C & D)

January 2015 February 2016 (Period 1)

Date AORD XYZ RF rm rj rm RF rj RF

Jan-15 5551.6 1.46 0.2062
Feb-15 5898.5 1.57 0.2071 6.2486 7.5342 6.0416 7.3272
Mar-15 5861.9 1.55 0.1943 -0.6205 -1.2739 -0.8147 -1.4681
Apr-15 5773.7 1.325 0.2218 -1.5046 -14.5161 -1.7265 -14.7380
May-15 5774.9 1.38 0.2282 0.02078 4.1509 -0.2074 3.9228
Jun-15 5451.2 1.105 0.2492 -5.6053 -19.9275 -5.8545 -20.1767
Jul-15 5681.7 1.15 0.2304 4.2284 4.0724 3.9980 3.8420
Aug-15 5222.1 1.085 0.2238 -8.0891 -5.6522 -8.3129 -5.8759
Sep-15 5058.6 1.05 0.2167 -3.1309 -3.2258 -3.3476 -3.4425
Oct-15 5288.6 1.19 0.2194 4.54671 13.3333 4.3273 13.1139
Nov-15 5218.2 1.48 0.2379 -1.3312 24.3697 -1.5691 24.1318
Dec-15 5344.6 1.615 0.2408 2.4223 9.1216 2.1815 8.8809
Jan-16 5056.6 1.75 0.2225 -5.3886 8.3591 -5.6111 8.1366
Feb-16 4947.9 1.675 0.1999 -2.1497 -4.2857 -2.3496 -4.4856
Average -1.0188 1.4745
Standard deviation 4.2838 11.7187
Variance 18.3512 137.3273
Coefficient of Variation -18.0119 93.1356
Correlation coefficient 0.4758
Beta 1.3015
January 2016 February 2017 (Period 2)

Date AORD XYZ RF rm rj rm RF rj RF

Jan-16 5056.6 1.75 0.2225
Feb-16 4947.9 1.675 0.1999 -2.1497 -4.2857 -2.3496 -4.4856
Mar-16 5151.8 1.74 0.2074 4.1209 3.8806 3.9135 3.6732
Apr-16 5316 1.76 0.2101 3.1872 1.1494 2.9772 0.9393
May-16 5447.8 2.05 0.1919 2.4793 16.4773 2.2874 16.2854
Jun-16 5310.4 1.9 0.1673 -2.5221 -7.3171 -2.6894 -7.4843
Jul-16 5644 2.16 0.1559 6.2820 13.6842 6.1261 13.5283
Aug-16 5529.4 2.19 0.1579 -2.0305 1.3889 -2.1884 1.2310
Sep-16 5525.2 2.09 0.1643 -0.0760 -4.5662 -0.2403 -4.7305
Oct-16 5402.4 1.99 0.1968 -2.2225 -4.7847 -2.4194 -4.9815
Nov-16 5502.4 2.06 0.2283 1.8510 3.5176 1.6227 3.2893
Dec-16 5719.1 2.28 0.2311 3.9383 10.6796 3.7072 10.4485
Jan-17 5675 2.11 0.2276 -0.7711 -7.4561 -0.9987 -7.6837
Feb-17 5704 2.14 0.2287 0.5110 1.4218 0.2823 1.1931
Average 0.7716 1.6325
Standard deviation 2.8883 7.8169
Variance 8.3423 61.1047
Coefficient of Variation 10.8118 37.4304
Correlation coefficient 0.7905
Beta 2.1394

C)

Comment

In the calculations above you can notice that there is a dramatic increase in the market risk premium
from the first period to the second whilst the asset premium has a much slighter but still noticeable
increase. This shows us that there is a higher level of risk with a dramatically higher risk for the
market returns over the stock returns. The standard deviations both increase between the two sub
periods which emphasises that the market and stock returns have fluctuated between the two
periods. The large differences in the variance show that there was much more fluctuation in the
stock returns than there were in the market returns. The values for the coefficient of variation are
representative of the spread in the market and the assets. The correlation coefficient represents
how much these values depends on each other/how similar they are to one another, it measures the
strength and direction of the two sets of data and the value can only be between -1 to 1. As you can
see in the data the value for period 2 has a high more positive linear relationship whilst Period one
has a smaller positive linear relationship.
D)

Calculations:

Period 1:

Correlation Coefficient X Standard Deviation(rj-RF) / Standard Deviation (rm-RF)

0.4758 X 11.7187 / 4.2838

= 1.3015

Period 2:

Correlation Coefficient X Standard Deviation(rj-RF) / Standard Deviation (rm-RF)

0.7905 X 7.8169 / 2.8883

= 2.1394

E)

Explain the value of Beta

Period 1:

For period 1 the beta was 1.3015 which means that it has a value of 0.3015 more than one. Since
this number is greater than one it means that in theory the stock is 30.15% more volatile than the
market. It also represents that for every 1% increase or decrease that there will be a 1.3015%
increase or decrease in the share price. Beta shows the relationship between the share price and the
market.

Period 2:

For period 2 the beta was 2.1394 which means it is over 2 times the volatility of the market. In the
case of a market providing a return of 15% on an investment it would be expected that the company
would have a return of 2.1394 times that value which would be over a 30% return. The higher the
value of beta the greater the change in return compared to the market.
F)

Explain why the estimated values are different

Beta is the measure of a stocks market risk and its relation to the company return. Beta is just the
number that represents how drastically the return on an investment can vary, when it is greater
than one is shifts at a greater rate than the market and when its lower is shifts at a smaller rate. The
reason that these values change from period to period is for the market is always changing. Beta
measures the systematic risk of a companys shares compared to the market return. Since this
involves the market return which is a time varying value we can see that the value of beta would
vary throughout different periods.