Business Analysis and Valuation Learning †MyAssignmenthelp.com

Question: Discuss about the Business Analysis and Valuation Learning. Answer: Introduction: As we know the standard deviation measures the average value by which the individual returns deviate from the average of return (Mean). In short it calculates the deviation of the returns as per the probability of their occurrence that is termed as market volatility. For example, if the returns of the stock changes frequently and has wide range there will be larger deviations from the mean of return. So it will provide higher standard deviation means high risk. If in actual buying of any stock has normal distribution of return that means 95% of returns fall under the 2 times change in standard deviation, than it can be said that there is more than 68%probability that return are highly close (+/-) to the average return (Palepu, 2007). Every share or stock has its own risk (Beta) and it impact the returns accordingly. If any investor wants to buy two or more risky assets than he will have to consider the risk associated with both the stocks to come with the risk of whole portfolio. Every stock has its own risk but there exists some co-relation between the stocks in portfolio. Co-relation is defined as the strength of relationship between two stocks. The risk of portfolio is the weight-age average of the risks of two stocks in accordance with the correlation exists between them. For example, if 80% money is invested in 5% risk stock and 20% in 30% risky stock and there is positive relation of 1 between them, than it can be said that risk of whole portfolio will be surely highly less than 30% but slightly greater than 5% as more weight-age has been given to stock with 5% risk (Weil, Schipper and Francis, 2013). The risk and standard deviation of risk free asset is zero as there is no risk in such stocks. In case the risk free asset are kept in any portfolio with other risky assets than the calculation of risk of such portfolio will change. For example if there is two equally weighted stocks, one with risk and other one with no risk than the risk of the whole portfolio will be square root of square of weight of risky assets multiply by its risk. There was no addition of risks of other assets as there is risk associated with it and its standard deviation is zero which is provide zero if added to square of its weight. Coming to the last part of risk calculation, i.e. correlation part, I must tell you there is no need to calculate such part as co-relation if risk and risk free assets is not defined or zero and there is multiplication of standard deviation which is also zero hence the answer will zero (Weil, Schipper and Francis, 2013). Systematic risk refers to the risks that arise due to market conditions like wars, interest rate etc. Whereas unsystematic risk refers to risk that is associated within the security i.e. risk in the company or the particular industry. Unsystematic risk can be reduce through diversification of investment whereas systematic risks can be reduced through taking prompt action while such risk take place for example taking the use of hedge (Weygandt, Kieso and Kimmel, 2010). Portfolio 1 Asset Percentage Expected return Standard Deviation of the Return Correlations A B A 0.40 11.50% 23.00% 1 0.25 B 0.60 14.00% 43.00% 0.25 1 Expected Return of the Portfolio 1 13.00% Variance of the portfolio 1 0.0869 Standard Deviation of the Portfolio 1 0.2948 or 29.48% Portfolio 2 Asset Percentage Expected return Standard Deviation of the Return Correlations A B C A 0.600 11.50% 23.00% 1.00 0.25 0.40 B 0.225 14.00% 43.00% 0.25 1.00 0.15 C 0.175 18.00% 58.00% 0.40 0.15 1.00 Expected Return of the Portfolio 2 13.20% Variance of the portfolio 2 0.0426 Standard Deviation of the Portfolio 2 0.2064 or 20.64 % There is difference between risk and return of portfolio 1 and portfolio 2 because in portfolio 1 there is 2 assets whereas portfolio 2 has three assets and different weights has been assigned to the assets while making the portfolio 1 and 2 (Stickney, 2009). Portfolio 3 Asset Percentage Expected return Standard Deviation of the Return Correlations A B F A 0.048 11.50% 23.00% 1.00 0.25 0.00 B 0.750 14.00% 43.00% 0.25 1.00 0.00 F 0.202 9.90% 0.00% 0.00 0.00 0.00 Expected Return of the Portfolio 3 13.05% Variance of the portfolio 3 0.1059 Standard Deviation of the Portfolio 3 0.3254 or 32.54 % Portfolio 4 Asset Percentage Expected return Standard Deviation of the Return Correlations A B C A 0.333 11.50% 23.00% 1.00 0.25 0.40 B 0.333 14.00% 43.00% 0.25 1.00 0.15 C 0.333 18.00% 58.00% 0.40 0.15 1.00 Expected Return of the Portfolio 4 14.50% Variance of the portfolio 4 0.0467 Standard Deviation of the Portfolio 4 0.2161 or 21.61 % Portfolio 5 Asset Percentage Expected return Standard Deviation of the Return Correlations A B C F A 0.250 11.50% 23.00% 1.00 0.25 0.40 0.00 B 0.250 14.00% 43.00% 0.25 1.00 0.15 0.00 C 0.250 18.00% 58.00% 0.40 0.15 1.00 0.00 F 0.250 9.90% 0.00% 0.00 0.00 0.00 0.00 Expected Return of the Portfolio 5 13.35% Variance of the portfolio 5 0.0262 Standard Deviation of the Portfolio 5 0.1620 or 16.20 % There are differences in the risk and returns of portfolio 3, 4 and 5 because of different percentage of investment of assets in the portfolio. The assets used in the entire three portfolios are same but amount of money invested in each category of asset is different in different portfolio that has created a major difference in the return and risk associated with each portfolio. Returns in all three portfolio are different due to different percentage of weights are used for the assets used in the portfolio. As risk free asset has also been used in the portfolio that provided return of 9.9% therefore it is make differences in the total expected return of the portfolio. There is no risk in the risk free assets so if no weights are changed but the returns of the assets got changed than risk will be same (Stickney, 2009). References Palepu, K. et al. 2007. Business Analysis and Valuation management: Text and Cases. Cengage Learning EMEA. Stickney, C.P. et al. 2009. Financial Accounting: An Introduction to Concepts, Methods and Uses. Cengage Learning. Weil, R., Schipper, K. and Francis, J. 2013. Financial Accounting: An Introduction to Concepts, Methods and Uses. Cengage Learning. Weygandt, J., Kieso, D.E. and Kimmel, P.D. 2010. Financial Accounting: IFRS. John Wiley Sons.