Master of Global Business

Individual Assignment
Corporate Finance 2

Submitted By:
Suchita Gupta MMAY17GF50
TABLE OF CONTENTS

S.NO. DESCRIPTION PAGE NO.

1. PORTFOLIO- STOCKS 3
2. AVERAGE ANNUAL RETURN 5
3. STANDARD DEVIATION 6
4. PROBABILITY OF VARIATION 7
5. WEIGHTS OF STOCK 8
6. PROBABILITY OF EACH STATE OF NATURE 11
7. RETURN FOR EACH STATE OF NATURE 13
8. EXPECTED RETURN AND SD OF PRTFOLIO 14
9. BETA OF VARIOUS STOCKS 15
10. BETA OF PORTFOLIO 16
11. RISK FREE RETURN AND MARKET RETURN 17
12. EXPECTED RETURN (CAPM) OF VARIOUS STOCKS 19
13. EXPECTED RETURN (CAPM) OF PORTFOLIO 20

Ans 1.

I have created my portfolio of 5 stocks registered in Tokyo Stock Market. I have particularly
chosen this market because it is one of the cheapest markets across all measures, although it is
not as straightforward as it appears. Japan is the most benefitted from the Chinas technological
revolution. Also, Chinese industries are rapidly automating due to rising labour cost and
declining labour force. Therefore, China is increasingly dependent on Japans innovation as
factory automation rises. According to me, the worlds hunger for Japans high quality and
innovative cars and electronics is not going away anytime soon. I also think Japan is reasonably
valued and is undergoing fiscal and structural reforms, therefore gains are expected in near
future. I particularly would like to invest in some assets in the region that show real promise
such as growth in technology companies and rise in robotics.
 Figure 1 Source: money.cnn.com
My portfolio consists of 5 stocks namely: -
Toyota Industries Corp
Nippon Telegraph & Telephone Corp
Shiseido Co Ltd
Yokohama Rubber Co Ltd
Yamaha Corp

Diversification helps the investor to manage the risk and reduce the volatility of the price
movment of an asset. I have diversified my portfolio to companies in automobiles, telecom,
skincare and tyre industries. The purpose is to avoid risk from a particular sector in that region
in case of any uncertainties and gain maximum return from that stock.

Toyota Nippon Telegraph & Shiseido Yokohama Yamaha

Telephone

Exchang %change %change %change %change %change

e Date Price in price Price in price Price in price Price in price Price in price
31-Dec-
2007 4,570.0 2,795.0 2,645.0 1,332.0 2,555.0
31-Dec-
2008 1,906.0 -58.29% 2,340.0 -16.28% 1,825.0 -31.00% 888.0 -33.33% 821.0 -67.87%
31-Dec-
2009 2,755.0 +44.54% 1,825.0 -22.01% 1,781.0 -2.41% 814.0 -8.33% 1,116.0 35.93%
31-Dec-
2010 2,521.0 -8.49% 1,837.5 0.68% 1,774.0 -0.39% 840.0 3.19% 1,008.0 -9.68%
31-Dec-
2011 2,095.0 -16.90% 1,967.5 7.07% 1,415.0 -20.24% 864.0 2.86% 706.0 -29.96%
 31-Dec-
2012 2,731.0 +30.36% 1,815.0 -7.75% 1,217.0 -13.99% 1,240.0 43.52% 908.0 28.61%
31-Dec-
2013 4,745.0 +73.75% 2,830.0 55.92% 1,691.0 38.95% 2,066.0 66.61% 1,669.0 83.81%
31-Dec-
2014 6,210.0 +30.87% 3,105.5 9.73% 1,693.0 0.12% 2,210.0 6.97% 1,795.0 7.55%
31-Dec-
2015 6,530.0 +5.15% 4,836.0 55.72% 2,529.0 49.38% 1,871.0 -15.34% 2,949.0 64.29%
31-Dec-
2016 5,570.0 -14.70% 4,912.0 1.57% 2,958.5 16.98% 2,096.0 12.03% 3,570.0 21.06%
Average
annual
return 9.59% 9.41% 4.15% 8.69% 14.86%
Std Deviation 39.48% 28.27% 26.60% 30.17% 46.61%
+2
0.88545 0.65946 0.57356 0.69016 1.08073
95% -2
probability -0.69370 -0.47130 -0.49047 -0.51645 -0.78352
+3
1.28024 0.94215 0.83957 0.99182 1.54680
99.73% -3
probability -1.08849 -0.75399 -0.75647 -0.81810 -1.24958

(Reference for Answer 2,3 and 4)

Ans 2.
Assumptions:
Thomson Reuters was used to collect the data for various stocks.
All the stocks taken are registered on Tokyo Stock Exchange.
The data is collected from the period of 2007 to 2016 and calculations are done on the
same data.

Calculations:
Average return for a stock is computed by calculating the percentage change in closing
price difference of current year from previous year.
Conclusions:
It can be inferred from the above table that Yamaha Corp has highest average return and
Shiseido Co. Ltd has the least average return among the various stocks of the portfolio. This
means investing in Yamaha Corp is most profitable when compared with other stocks of the
portfolio.

Ans 3.

Assumptions:
Thomson Reuters was used to collect the data for various stocks.
The data is collected from the period of 2007 to 2016 and calculations are done on the
same data.
Calculations:
Standard deviation measures the dispersion of the price of the stock from the average
mean value of the stock.
This also helps to measure the volatility of a stock and predict performance trends.

Conclusions:
It can be inferred from the calculations that Yamaha Corp has highest standard deviation whereas
Shiseido Co. Ltd has the least standard deviation. This proves higher the risk, higher is the
return of an asset.

For a single stock, standard deviation is used to measure the risk.

For a portfolio, beta is used to measure the risk.

Being an aggressive investor, I would be interested more in investing in Yamaha Corp as this
gives highest returns despite high standard deviation. While conservative investor may invest
more in a stock with low standard deviation as it would be less risky.

Ans 4.

Assumptions:
 The average rate of return for each stock is assumed to be distributed normally over a
period of 10 years.

Calculations:
The empirical rule is used for the calculations which provides the quick estimate of
spread of data in normal distribution given the mean and standard deviation of the
stock.

Figure 2 Source: statisticshowto.com

Conclusions:

I. For Toyota Industries Corp, it can be interpreted as follows

The shares return from -69.37 % to 88.54%, 95 % of the time and
The shares return from -108.85 % to 128.02%, 99.73 % of the time

II. For Nippon Telegraph & Telephone Corp, it can be interpreted as follows
The shares return from -47.13 % to 65.95%, 95 % of the time and
The shares return from -75.40 % to 94.21%, 99.73 % of the time

III. For Shiseido Co. Ltd, it can be interpreted as follows

The shares return from -49.05 % to 57.36%, 95 % of the time and
The shares return from -75.65 % to 83.96%, 99.73 % of the time
IV. For Yokohama Rubber Co. Ltd, it can be interpreted as follows
The shares return from -51.64 % to 69.02%, 95 % of the time and
The shares return from -81.81 % to 99.18%, 99.73 % of the time
V. For Yamaha Corp, it can be interpreted as follows
The shares return from -78.35% to 108.07%, 95 % of the time and
The shares return from -124.96 % to 154.68%, 99.73 % of the time

Ans 5.
 Toyota Nippon Shiseido Yokohama Yamaha Total

Market Price 6550 5106 4432 2276 3895

Market Cap 982500 765900 664800 341400 584250 3338850

Weights 29.43% 22.94% 19.91% 10.23% 17.50%

Assumptions:
No. of shares owned for is 150 for each stock.
Market price of each stock is taken from Tokyo stock exchange.

Calculations:
Weights for each stock is calculated by dividing the market cap of a particular stock with
the market cap of all the stocks together.
Ans 6.

Year GDP Annual growth (%)

2008 -1.10%
2009 -5.40%
2010 4.20%
2011 -0.10%
2012 1.50%
2013 2.00%
2014 0.30%
2015 1.20%
2016 1.00%

Condition Year Probability

2010
Boom 0.22
2013
2011
2012
Neutral 2014 0.56
2015
2016
2008
Recession 0.22
2009
 Figure3: Tradingeconomics.com

Assumptions:
The real GDP growth % of Japan is obtained from databank of World Bank.
GDP data of Japan varies from -5.40% to 4.20%.
Following states of nature are assumed
Boom > = 2.00%
Neutral > -1.1% to 2.00% <
Recession <= -1.1%

Conclusions:

As per the assumptions mentioned above, following are the probabilities of different states of
nature: -

BOOM 0.22

NEUTRAL 0.56

RECESSION 0.22
Ans 7.

Toyota Nippon Shiseido Yokohama Yamaha

Weight 29.43% 22.94% 19.91% 10.23% 17.50%

Probabilit
State y Expected Return

Recession 0.22 -6.87% -19.14% -16.71% -20.83% -15.97%

Neutral 0.56 34.79% 66.35% 32.25% 50.03% 106.46%

Boom 0.22 65.25% 56.61% 38.56% 69.81% 74.13%

ER 32.32% 45.40% 22.87% 38.79% 72.41%

Conclusions:
 The expected return is computed for each state of nature of different stocks by
multiplying the probability with the average returns.
It can be infered from data each state of nature has an effect on the expected return of
the stock

Ans 8.

Yokoham
Toyota Nippon Shiseido a Yamaha
29.43
Weight % 22.94% 19.91% 10.23% 17.50% `
State Prob Expected Return Portfolio
Recessio
n 0.22 -6.87% -19.14% -16.71% -20.83% -15.97% -0.1466515
34.79 0.5562278
Neutral 0.56 % 66.35% 32.25% 50.03% 106.46% 8
65.25 0.5997338
Boom 0.22 % 56.61% 38.56% 69.81% 74.13% 3
E(R) 41.12%
Std 0.2967525
deviation 3
 +2
95% probability 1.00
-2
-0.18
+3
99.73% probability 1.30
-3
-0.48

Conclusions:

The average return of portfolio is 41.12% which is a quite significant value and means
higher return is expected from the portfolio created.
The standard deviation of portfolio is 29.67% which is comparitively low when compared
with individual stocks.
For the portfolio, it can be interpreted as follows
The shares return from -18 % to 100%, 95 % of the time and
The shares return from -48% to 130%, 99.73 % of the time

Ans 9.

% change
in market % change % change % change % change % change
` price Toyota Nippon Shiseido Yokohama Yamaha
AVERAGE 0.05% 0.31% 0.57% 0.39% 0.88% 0.86%
0.00362883 0.00159291 0.00195923 0.00391994
Covariance 6 6 6 4 0.004082031

Variance 0.00315218
of Market 3
1.15121357 0.50533756 1.24356489
Beta 1 4 0.62154905 8 1.294985441

Assumptions:
 The market data is obtained from Tokyo Stock Price Indeks (TOPIX).
Monthly data for 10 years is obtained for % change in market price.
I have used covariance method to calculate beta of different stocks against the market
return (TOPIX).

Calculations:

Beta = Covariance (Stock, Market)/ Variance (Market)

Conclusions:

Analysis of Beta for various stocks

Toyota stock is more risky than average

Nippon stock is less risky than average
Shiseido stock is less risky than average
Yokohama stock is more risky than average
Yamaha stock is more risky than average

For stocks having

Beta > 1 Stock is riskier than average
Beta < 1 Stock is less risky than average

Difference between beta and standard deviation are as following:-

Beta is used to measure the risk of the stock with respect to the market condition
or in other words measures the systematic risk of the various stocks
Standard deviation measures the volatility of the various stocks or in other words
measures the unsystematic risk pertaining to the particular company.

Ans 10.

Stock Beta Weight

Toyota 1.151213571 29.43%

Nippon 0.505337564 22.94%

Shiseido 0.62154905 19.91%

Yokohama 1.243564898 10.23%

Yamaha 1.294985441 17.50%

 Portfolio Beta 0.93

Calculations:
Portfolio beta is computed by multipying the beta of various stocks with their
corresponding weights.

Conclusions:
Beta of portfolio is 0.93 which means that the portfolio is less risky than average.

Ans 11.

Risk free rate of return = 10 year JAPAN treasury bond = 0.026%

Market return = 3.29%

Exchange Date Close % change

31-Dec-2007 1,475.68
31-Dec-2008 859.24 -41.77%
31-Dec-2009 907.59 5.63%
31-Dec-2010 898.80 -0.97%
31-Dec-2011 728.61 -18.94%
 31-Dec-2012 859.80 18.01%
31-Dec-2013 1,302.29 51.46%
31-Dec-2014 1,407.51 8.08%
31-Dec-2015 1,547.30 9.93%
31-Dec-2016 1,518.61 -1.85%
Average 3.29%

Figure 4 Source: Bloomberg

Assumptions:

10 year Japan treasury Bond is used o calculate the risk free rate or return.
Market return is calculated using the average return of market for 10 years on annual
basis.
Tokyo Stock Price Index (TOPIX) is used as the benchamark for calculations.

Conclusions: Reason for selection of 10-year Government bond

When confidence is high, the ten-year treasury bond's price drops and yields go higher
because investors feel they can find higher returning investments and do not feel they
need to play it safe.
 But when confidence is low, the price goes up as there is more demand for this safe
investment and yields fall.

Ans 12.

Risk free Market Expected Return Expected Return

Stock rate Beta return (CAPM) (Probablity)
1.15121357
Toyota 0.026% 1 3.29% 3.78% 32.32%
0.50533756
Nippon 0.026% 4 3.29% 1.67% 45.40%
Shiseido 0.026% 0.62154905 3.29% 2.05% 22.87%
 1.24356489
Yokohama 0.026% 8 3.29% 4.08% 38.79%
1.29498544
Yamaha 0.026% 1 3.29% 4.25% 72.41%

Assumptions:

Expected return for various stocks is calculated using capital aset pricing model (CAPM).
Risk free rate of 0.26% is used which is the rate of 10-year Japan government bond.

Conclusions:

It is observed that there is a huge difference between the expected return calculated using CAPM
and the actual return.
As beta is used in CAPM method and risk-free rate is very less, therefore the expected returns
calculated using CAPM method are very less in comparison with actual returns.

Ans 13.
 Risk free Beta Market Expected Return Expected Return
rate return (CAPM) (Probablity)

Portfolio 0.026% 0.93 3.29% 3.07% 41.12%

Assumptions:

Expected return for portfolio is calculated using capital aset pricing model (CAPM).
Risk free rate of 0.26% is used which is the rate of 10-year Japan government bond.

Conclusions:

It is observed that there is a huge difference between the expected return calculated
using CAPM and the actual return.
As beta is used in CAPM method and risk-free rate is very less, therefore the expected
returns calculated using CAPM method are very less in comparison with actual returns.