Corporate and International

Finance

Assignment No.1

RISK ANDMARKET ANALYSIS OF TWO

COMPANIES THAT OPERATE IN DIFFERENT
SECTORS OF THE UK ECONOMY.(BY CAPM AND
BETA VALUE)

SUBMITTED BY:

ANOOP SAXENA K0226432

Page 1 of 25
 SUBMITTED TO:

Dr Yongsheng Guo

Contents
Introduction

Companies’ profile
• Tesco profile
• Royal Bank of Scotland
What is Beta?
Calculation of beta for Tesco
Calculation of beta for Royal Bank of
Scotland
Required rate of return
Calculation of expected rate of return
Significance and assumption of CAPM
Acceptability or Implication of CAPM

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Conclusion
Reference
Bibliography
Appendix

Introduction
In the mid-1960s, the three economists- William
Sharpe, John Lintner, and Jack Treynor, found the
simple equation to calculate the risk and expected
return on the investment of capital. This model or
equation is known as the Capital Asset Pricing Model
(CAPM). Capital Asset Pricing Model (CAPM) is the
model used to describe the relation between the risk
and expected return on the investment. It helps the
investors to determine the appropriate price of the
investment
Ri=Rf+βRm-Rf

Ri = rate of expected return

Rf = risk free return (treasury bills, libor rate)
Rm =rate of market return
 = beta value of company

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CAPM is a simple but powerful model. Moreover it takes
into the basic principles of portfolio selections:
• Efficient portfolios (Maximize excepted return
subject to risk).
• The highest risk premium to standard deviation is
a combination of the market portfolio and the risk-
free asset.
• Individual stocks should be selected on their
contribution to portfolio risk.
• Beta measures the marginal contribution of the
stock to the market portfolio.

Page 4 of 25
Companies’ profile
Tesco profile
Tesco is one of the major grocery retail company. With
its subsidiaries, it operates in various foods, non-food,
and other retailing services. The Tesco is the third-
largest retailer in the world measured in terms of
revenue, after Wal-mart and Carrefour. And second
largest in terms of profit after Wal-mart. There are
more than 4811 stores across the globe( United
Kingdom, the Republic of Ireland, Hungary, Poland, the
Czech Republic, Slovakia, Turkey, Thailand, South
Korea, Malaysia, Japan, China, India, and the United
States).
The company was founded by Jack Cohen in 1919. And
opens its first store in 1929 in Burnt Oak, Edgware,
Middlesex. The store operates over 40,000 product
line. The store operates in multi-store formats across
the United Kingdom. The stores sales all kinds of
products that includes food, non food, wines and
spirits, electrical equipments, home entertainment,
cosmetics, pharmaceutical products and clothing’s and
others products.

Royal Bank of Scotland

The Royal Bank of Scotland Group plc, through its
subsidiaries, offers banking and financial services to

Page 5 of 25
personal, commercial, corporate, and institutional
customers in the United Kingdom, the United States,
and internationally. Royal Bank of Scotland has around
700 branches, mainly in Scotland though there are
branches in many larger towns and cities
throughout England and Wales. It provides private
banking and investment services, and offshore banking
services; and debt and equity financing and risk
management services, as well as money markets,
currencies and commodities, equities, credit markets
and portfolio management and origination services.
The company also offers global payments, cash and
liquidity management, and trade finance and
commercial card products and services; sells and
underwrites retail and SME insurance over the
telephone and Internet, as well as through brokers and
partnerships; and offers general insurance, including
motor insurance under the brands of Direct Line,
Churchill, Privilege, Green Flag, and NIG. In addition, it
provides operational technology, customer support in
telephony, account management, lending and money
transmission, global purchasing, property, and other
services. The company was founded in 1727 and is
headquartered in Edinburgh, the United Kingdom. The
Royal Bank of Scotland Group plc operates as a
subsidiary of HM Treasury

What is Beta?

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“The market risk is measured by Beta; it shows the
sensitivity of the return is to the market movements.
Beta measures the risk of an asset relative to the
average asset. By definition the average assets have
the beta value 1, relative to itself.”
Beta can be defined as – “a quantitative measure of
the volatility of a given stock, mutual funds, or
portfolio, relative to the overall market. Specifically,
the performance of the stock, fund, or portfolio has
experienced in the last 5 years as the market moved
1% up or down. A beta above 1 is more volatile than
the beta whose value is less than 1.”( investorwords)
Beta value of a stock can take one of the following
forms.
1. Negative Beta – This is a rarity, and means the
stock is moving just reverse to the market.
2. Zero (0) Beta – This means the value of the stock
stays same irrespective of market movement.
Again a rarity.
3. Beta between 0 and 1 – This means the stock price
swing less compared to market movements. Many
blue chip company stocks and high-liquidity stocks
have beta less than one. In a long-term
prospective these stocks fall under low-risk low-
profit category.
4. Beta of 1 – This means the stock price moves in
the same relation with the market. This can be the
case with many index-related products.
5. Beta greater than 1 – This means the stock price
swings more compared to market movements.
Page 7 of 25
 Many growing companies and technology
companies have beta greater than one. Most of
these stocks fall under high-return high-risk
category. Also remember, beta at very high levels
probably indicates high price volatility because of
low-liquidity.
Formula of beta(β )
β=cov(rs,rm)var(rm)
rs=rate of return of stock(for given time)
rm=rate of return of market(for given time)

Calculation of beta for Tesco

The beta of Tesco is calculated by the use of excel

slope formula.

Adj Close Adj Close return of return of ftse

Date tesco l ftse 100 tesco 100 beta of tesco for 5yrs
slope(return of
(B3/B4-1) (C3/C4-1) tesco,return of market)
0.025826
01-12-2010 425 5899.9 696 0.06721777 0.783190952
-
0.029401
01-11-2010 414.3 5528.3 429 -0.02588455
0.006721
01-10-2010 426.85 5675.2 698 0.022816566 beta for year2010
0.045339
01-09-2010 424 5548.6 119 0.061892368 0.616389636
0.038295 -
02-08-2010 405.61 5225.2 149 0.006238113
0.027891
01-07-2010 390.65 5258 067 0.069372979 beta for year2009
-
0.076652 -
01-06-2010 380.05 4916.9 089 0.052328271 0.507950734
04-05-2010 411.6 5188.4 - -
0.054119 0.065708678

Page 8 of 25
 269
-
0.000688 -
01-04-2010 435.15 5553.3 942 0.022237482 beta for year2008
0.037526
01-03-2010 435.45 5679.6 805 0.060715286 1.156637854
-
0.011423
01-02-2010 419.7 5354.5 861 0.031993833
-
0.008060 -
04-01-2010 424.55 5188.5 748 0.041456521 beta for year2007
0.011820
01-12-2009 428 5412.9 331 0.042807328 1.008567269
0.035521
02-11-2009 423 5190.7 065 0.02898206
0.022247 -
01-10-2009 408.49 5044.5 247 0.017413662 beta for year2006
0.063048
01-09-2009 399.6 5133.9 683 0.045835116 0.24431558
0.023274
03-08-2009 375.9 4908.9 806 0.065207013
0.038885
01-07-2009 367.35 4608.4 747 0.084533559
-
0.030967 -
01-06-2009 353.6 4249.2 388 0.038185563
0.082147
01-05-2009 364.9 4417.9 094 0.041049085
0.011397
01-04-2009 337.2 4243.7 72 0.080894526
0.000600
02-03-2009 333.4 3926.1 24 0.02506462
-
0.069793 -
02-02-2009 333.2 3830.1 412 0.076995373
-
02-01-2009 358.2 4149.6 -0.005 0.064182942
0.219099
01-12-2008 360 4434.2 221 0.034095149
-
0.129935 -
03-11-2008 295.3 4288 18 0.020400704
-
0.124355 -
01-10-2008 339.4 4377.3 005 0.107129016
0.015989 -
01-09-2008 387.6 4902.5 515 0.130238087
01-08-2008 381.5 5636.6 0.058546 0.0415196

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 06 14
- -
01-07- 0.024099 0.03803835
2008 360.4 5411.9 648 8
- -
02-06- 0.108186 0.07063682
2008 369.3 5625.9 428 2
- -
01-05- 0.034731 0.00555254
2008 414.1 6053.5 935 4
01-04- 0.131926 0.06755405
2008 429 6087.3 121 9
- -
03-03- 0.053682 0.03096375
2008 379 5702.1 896 1
-
01-02- 0.039568 0.00076533
2008 400.5 5884.3 345 2
- -
01-01- 0.126244 0.08937725
2008 417 5879.8 107 5
-
03-12- 0.003653 0.00379323
2007 477.25 6456.9 445 7
- -
01-11- 0.018442 0.04301059
2007 479 6432.5 623 3
01-10- 0.110984 0.03940124
2007 488 6721.6 633 9
03-09- 0.033529 0.02593879
2007 439.25 6466.8 412 4
-
01-08- 0.042305 0.00893067
2007 425 6303.3 334 7
- -
02-07- 0.025686 0.03750056
2007 407.75 6360.1 977 8
- -
01-06- 0.087738 0.00203884
2007 418.5 6607.9 42 4
-
01-05- 0.008108 0.02670098
2007 458.75 6621.4 108 6
02-04- 0.041080 0.02238427
2007 462.5 6449.2 473 4
01-03- 0.028356
2007 444.25 6308 481 0.0221178
01-02- 432 6171.5 0.033492 -
2007 823 0.00509422

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 7
-
01-01- 0.033374 0.00284529
2007 418 6203.1 536 3
01-12- 0.033865 0.02843539
2006 404.5 6220.8 815 2
- -
01-11- 0.005717 0.01311753
2006 391.25 6048.8 916 6
02-10- 0.093055 0.02825124
2006 393.5 6129.2 556 1
-
01-09- 0.045725 0.00926161
2006 360 5960.8 646 1
01-08- 0.049374
2006 377.25 5906.1 131 -0.00374475
03-07- 0.076347 0.01626838
2006 359.5 5928.3 305 6
01-06- 0.042121 0.01914811
2006 334 5833.4 685 8
-
01-05- 0.022524 0.04969201
2006 320.5 5723.8 247 9
-
03-04- 0.031815 0.00980786
2006 313.44 6023.1 655 6
-
01-03- 0.023673
2006 323.74 5964.6 814 0.02988863
01-02- 0.062890 0.00541638
2006 331.59 5791.5 663 5
02-01-
2006 311.97 5760.3

0.421934 0.09018803
total (Σ) 192 7

The values of beta for Tesco are as follows:-

YEAR BETA VALUE OF TESCO

2006-10 0.783190952

2010 0.616389636

Page 11 of 25
2009 0.507950734

2008 1.156637854

2007 1.008567269

2006 0.24431558

Tesco
The Tesco share is less volatile. This means the stock
price swing less compared to market movements.
The company stocks and high-liquidity stocks have
beta less than one. In a long-term prospective these
stocks fall under low-risk low-profit category. By
keeping the share of Tesco in our portfolio, we can
minimize the risk of loss. But on the other hand we
also play down the possibility of making good profit
in short period of time. The share of Tesco is good to
play for long term/long period, say more than 2
years. But it not good for the professional traders,
who use to buy and sales share on daily basis.
Tesco share is good for the general public, small
investors, and the peoples who don’t want to take
the risk on their investment. It is not 100% safe as
the Treasury bill, LIBOR rate or any other
government securities.
Calculation of beta for Royal Bank of Scotland
The beta of Royal Bank of Scotland is calculated by
the use of excel slope formula.
Adj
Close Adj Close return return of ftse
Date rbs l ftse100 of rbsl 100 beta for 5yrs

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 (B3/B4- slope(return of
1) (C3/C4-1) RBS,return of FTSE)
01-12- 0.03937 0.0672177
2010 39.07 5899.9 22 7 2.232457592
- -
01-11- 0.15736 0.0258845
2010 37.59 5528.3 4 5
-
01-10- 0.06301 0.0228165
2010 44.61 5675.2 2 66
01-09- 0.06796 0.0618923
2010 47.61 5548.6 77 68 beta for year2010
- -
02-08- 0.10768 0.0062381
2010 44.58 5225.2 6 13 1.528353377
01-07- 0.20588 0.0693729
2010 49.96 5258 95 79
- -
01-06- 0.11341 0.0523282
2010 41.43 4916.9 8 71 beta for year2009
- -
04-05- 0.14020 0.0657086
2010 46.73 5188.4 2 78 3.20285309
-
01-04- 0.23522 0.0222374
2010 54.35 5553.3 73 82
01-03- 0.16803 0.0607152
2010 44 5679.6 82 86 beta for year2008
01-02- 0.16625 0.0319938
2010 37.67 5354.5 39 33 1.870793735
-
04-01- 0.10616 0.0414565
2010 32.3 5188.5 44 21
-
01-12- 0.11995 0.0428073
2009 29.2 5412.9 2 28 beta for year2007
-
02-11- 0.20981 0.0289820
2009 33.18 5190.7 2 6 0.594055001
- -
01-10- 0.20698 0.0174136
2009 41.99 5044.5 8 62
-
01-09- 0.08152 0.0458351
2009 52.95 5133.9 6 16
03-08- 0.28539 0.0652070
2009 57.65 4908.9 58 13 beta for year2006
01-07- 0.0845335
2009 44.85 4608.4 0.15059 59 1.073393588

Page 13 of 25
 -
01-06- 0.02041 0.0381855
2009 38.98 4249.2 88 63
-
01-05- 0.08612 0.0410490
2009 38.2 4417.9 4 85
01-04- 0.70612 0.0808945
2009 41.8 4243.7 24 26
02-03- 0.05603 0.0250646
2009 24.5 3926.1 45 2
-
02-02- 0.05454 0.0769953
2009 23.2 3830.1 55 73
- -
02-01- 0.55465 0.0641829
2009 22 4149.6 6 42
-
01-12- 0.10669 0.0340951
2008 49.4 4434.2 1 49
- -
03-11- 0.18074 0.0204007
2008 55.3 4288 1 04
- -
01-10- 0.62290 0.1071290
2008 67.5 4377.3 5 16
- -
01-09- 0.23748 0.1302380
2008 179 4902.5 7 87
01-08- 0.10861 0.0415196
2008 234.75 5636.6 87 14
- -
01-07- 0.01511 0.0380383
2008 211.75 5411.9 6 58
- -
02-06- 0.05908 0.0706368
2008 215 5625.9 1 22
- -
01-05- 0.33768 0.0055525
2008 228.5 6053.5 1 44
01-04- 0.0675540
2008 345 6087.3 0.02298 59
- -
03-03- 0.12402 0.0309637
2008 337.25 5702.1 6 51
01-02- 0.00785 0.0007653
2008 385 5884.3 34 32
-
02-01- - 0.0893772
2008 382 5879.8 0.13964 55

Page 14 of 25
03-12- - 0.0037932
2007 444 6456.9 0.03268 37
- -
01-11- 0.11132 0.0430105
2007 459 6432.5 6 93
01-10- - 0.0394012
2007 516.5 6721.6 0.01619 49
-
03-09- 0.08616 0.0259387
2007 525 6466.8 2 94
-
01-08- - 0.0089306
2007 574.5 6303.3 0.03038 77
- -
02-07- 0.06398 0.0375005
2007 592.5 6360.1 1 68
-
01-06- 0.00876 0.0020388
2007 633 6607.9 49 44
-
01-05- 0.02410 0.0267009
2007 627.5 6621.4 6 86
-
02-04- 0.02723 0.0223842
2007 643 6449.2 1 74
-
01-03- 0.01195
2007 661 6308 8 0.0221178
- -
01-02- 0.01762 0.0050942
2007 669 6171.5 1 27
-
02-01- 0.02560 0.0028452
2007 681 6203.1 24 93
01-12- 0.08319 0.0284353
2006 664 6220.8 74 92
- -
01-11- 0.01446 0.0131175
2006 613 6048.8 9 36
02-10- 0.01633 0.0282512
2006 622 6129.2 99 41
01-09- 0.03204 0.0092616
2006 612 5960.8 05 11
-
01-08- 0.02241 0.0037447
2006 593 5906.1 38 5
03-07- - 0.0162683
2006 580 5928.3 0.02027 86
01-06- 592 5833.4 0.03135 0.0191481

Page 15 of 25
 2006 89 18
- -
02-05- 0.03691 0.0496920
2006 574 5723.8 3 19
-
03-04- 0.04487 0.0098078
2006 596 6023.1 2 66
01-03- 0.07082 0.0298886
2006 624 5964.6 18 3
01-02- 0.09843 0.0054163
2006 582.73 5791.5 36 85
03-01-
2006 530.51 5760.3

-
1.41182 0.0901880
total() 2 37

9.0188
market return (%) rm 04

treasury bill rate (%) 5

years rf 2.24

expected rate of return 17.373

Rj 39

The values of beta for Royal Bank of Scotland are as

follows:-
YEAR BETA VALUE OF Royal
Bank of Scotland
2006-10 2.232457592

Page 16 of 25
2010 1.528353377

2009 3.20285309

2008 1.870793735

2007 0.594055001

2006 01.073393588

The Royal Bank of Scotland share is more volatile in

comparison of Tesco. This means the stock price
swings more compared to market movements. Many
growing companies and technology companies have
beta greater than one. Most of these stocks fall under
high-return high-risk category. Also remember, beta at
very high levels probably indicates high price volatility
because of low-liquidity.by keeping the share of Royal
Bank of Scotland in our portfolio, we can maximise the
profit. But on the other hand we also increase the
possibility of making good loss in short period of time.
The share of Royal Bank of Scotland is good to play for
short term/short period, say less than six month. But it
is good for the professional traders, who use to buy
and sales share on daily basis.
Royal Bank of Scotland share is not good for the
general public, small investors, and the peoples who
don’t want to take the risk on their investment.
Because it is very volatile and it can’t be trusted.

Page 17 of 25
The comparison of the beta value of Tesco and
Royal Bank of Scotland.( on the basis of each year)
Year TESCO ROYAL BANK OF
SCOTLAND
2006- 0.783190952 2.232457592
10
2010 0.616389636 1.528353377
2009 0.507950734 3.20285309
2008 1.156637854 1.870793735
2007 1.008567269 0.594055001
2006 0.24431558 01.073393588

Year Tesco Royal Bank of Scotland

2006 The share of The share of Royal bank

Tesco is very less of Scotland is volatile
volatile. but near to the ideal
condition.
2007 The beta value The share value
the share reaches becomes less volatile.
near to the ideal
market situation
2008 Due to the Due to the recession
recession period period the share value
the share value becomes more volatile.
becomes more
volatile.

Page 18 of 25
 2009 In this period the In this year the beta
beta value of value of the share
share becomes reaches up to the 3.2%
less volatile in mark.
comparison of
others
2010 The beta value in The beta value falls
this year remains down to nearly half of
nearly the same the previous year. But
as the previous still it is more volatile
year than the other.
As per the above the Tesco is much safer for the
small investors in comparison to the Royal Bank of
Scotland. But the return is also less in comparison to
the Royal Bank of Scotland, when the market moves
up.
Required rate of return
The CAPM establishes the linear relationship between
the required rate of return of a share and its
systematic or undiversified risk or beta. The rate of
return can be described as the minimum rate of return
that an investment must provide or must be expected
to provide in order to justify its acquisition.
The CAPM states that the expected return of a security
or a portfolio should equal the rate on a risk-free
security (Treasury bond, LIBOR rate) plus a risk
premium. If this expected return does not meet or
exceed the required return, the investment should not
be undertaken. The security market line plots the
results of the CAPM for all different risks (betas).
Ri=Rf+βRm-Rf

Page 19 of 25
Ri = rate of expected return
Rf = risk free return (treasury bills, libor rate)
Rm =rate of market return
 = beta value of company
The risk free rate of return can be described as the rate
of return with zero risk. It is the rate of interest an
investor gets or would expect from absolute risk free
investment over a specified period of time. The
treasury bills, LIBOR rate is considered as the risk free
rate of return.

Calculation of expected rate of return

• Royal bank of Scotland
Ri=Rf+βRm-Rf

Ri = rate of expected return

Rf = 2.24% (treasury bills)
Rm =9.018804
 = 2.232457592
Ri=2.24+2.232457592(9.018804-2.24)
Ri= 2.24+ 2.232457592* 6.778804
Ri= 2.24+ 15.13339245447997
Ri= 17.37339245447997
The excepted rate of return of the Royal Bank of
Scotland is 17.37339245447997%. The investors of

Page 20 of 25
the Royal Bank of Scotland expect the rate of return on
the investment is about 17.37%
Tesco
Ri=Rf+βRm-Rf

Ri = rate of expected return

Rf = 2.24% (treasury bills)
Rm =9.018804
 = 0.783190952
Ri=2.24+0.783190952 (9.018804-2.24)
Ri= 2.24+ 0.783190952* 6.778804
Ri= 2.24+5.309097958181408
Ri= 5.309097958181408
The excepted rate of return of the Tesco is
5.309097958181408 %. The investors of the Tesco
expect the rate of return on the investment is about
5.31%
Significance and assumption of CAPM
The greatest advantage of Capital asset pricing model
(CAPM) is the idea that risk-return relation of every
portfolio can be optimized to attain lowest risk for a
specific level of return. Many investors following CAPM
prefer to invest in low-cost index funds rather than on
stocks. CAPM necessitates diversification of portfolio. It
helps the investor to select the portfolio of its choice,
whether they want to invest in low risk shares or high
risk share. Or they can manage their portfolio by
keeping some volatile and some less volatile shares.

Page 21 of 25
Assumptions
1. If investors agree on the distribution of asset
returns.
2. If Investors have the same fixed (static) investment
horizon.
3. Investors hold efficient frontier portfolios.
4. There is a risk-free asset:
• paying interest rate rF
• in zero net supply.
5. Demand of assets equals supply in equilibrium.

Acceptability or Implication of CAPM

1. The market portfolio is the tangent portfolio.
2. Combining the risk-free asset and the market
portfolio gives the portfolio frontier.
3. The risk of an individual asset is characterized by its
co variability with the market portfolio.
4. The part of the risk that is correlated with the
market portfolio,
The systematic risk cannot be diversified away.
• Bearing systematic risk needs to be rewarded.
5. The part of an asset’s risk that is not correlated with
the market portfolio, the non-systematic risk, can be
diversified away by holding a frontier portfolio.
• Bearing non-systematic risk need not be rewarded.

Conclusion
Page 22 of 25
 According to the calculation of betas and CAPM the
share price of Royal Bank of Scotland is more volatile in
nature than the share price of Tesco. According to me
the Tesco is more safe option in the portfolio, instead
of Royal Bank of Scotland; for the investor who don’t
want to take risk and play safe in the market. The
excepted rate of return of Royal Bank of Scotland is
much higher than Tesco. And for those investors who
want to take the risk and earn more profit can opt for
the Royal Bank of Scotland share. But they always
have a risk of crashing and losing a huge amount of
investment. If, I have to invest in a share, I will invest
in the share of Royal Bank of Scotland; so that I can
earn more profit. But I also have to keep the eye on the
fluctuation of the market and Royal Bank of Scotland
share price. So, that I can minimise the risk of losing
my investments.
Reference
http://www.investorwords.com/468/beta.html : beta
(accessed on 20 march 2011)
W. F. Sharpe, (September 1964), “Capital Asset Prices:
A Theory of Market Equilibrium under Conditions of
Risk,” Journal of Finance 19 pp. 425–442

J. Lintner, (February 1965), “The Valuation of Risk

Assets and the Selectionof Risky Investments in Stock
Portfolios and Capital Budgets,” Review of Economics
and Statistics 47 pp. 13–37.

Page 23 of 25
Treynor’s article has not been published.

Helbaek, Morten Lindset, Snorre Mclellan, Brock ,

(2010) Corporate Finance; Pages: 164 : McGraw-Hill
Education ; : Berkshire, GBR

Frank J.Fabozzi, Jack Clark Francis, (march.1978); The

Journal of Financial and Quantitative Analysis, Vol.13
no.1; page 101-116

Bibliography
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