MCR006A Financial Management DrupadKumar Hasmukhbhai Patel 1546484 ASSESSMENT 2 INDIVIDUAL RESEARCH REPORT The Capital Asset Pricing Model (CAPM) is a financial model that evaluates an investment's expected return by comparing its risk to the market as a whole. It assists investors in deciding if the price is appropriate based on the investment's risk and potential rewards. The CAPM is calculated using the following formula: The expected return is computed as follows: (Return on Investment - Risk-Free Rate) The risk-free rate, which is generally represented by the yield on government bonds, is the return on a risk-free investment. Beta assesses how sensitive an investment's returns are to market swings. A beta number of one indicates that the investment follows the market's fluctuations, whereas a beta value greater than one indicates more volatility. The word is Market Return. 1. Gather historical price data: Compile the preceding three years' stock values for the firm and a market index (such as the ASX 200). 2. Determine returns: Determine the annual, monthly, and daily returns for the market index and the company's shares. 3. Determine covariance: Determine the relationship between the company's and market returns. 4. Calculate variance: Determine the variance of market returns. 5. Calculate beta: Divide the covariance by the variance to get the beta coefficient. To compute the CAPM, several components must be present. The risk-free rate, or the return on an investment with no risk, is required first. It is usually approximated using the yield on government assets such as treasury bills or bonds. The risk-free rate is the needed minimum return for an investor before taking on further risk. The second component is beta (), which measures how sensitive an investment's returns are to market fluctuations. The volatility of an investment in proportion to the market as a whole is measured by beta. A beta of one suggests that the investment moves in lockstep with the market. If an investment's beta value is larger than one, it is expected to experience more price swings than the market. The third component is the market return, which represents the market's total return. It is typically represented by a broad market index such as the S&P 500 or a country-specific index such as the ASX 200 in Australia. The market return is the average return on investment for the whole market. In order to apply the CAPM, an investor would determine the risk-free rate, the beta of the investment, and the market return. Entering these variables into the CAPM algorithm yields the estimated return on investment. The formula is as follows: The expected return is computed as follows: * Beta = (Market Return - Risk-Free Rate) For example, if the risk-free rate was 3%, the beta was 1.2, and the market return was 8%, the expected return would be as follows: Expected return = 3% + 1.2 * (8% - 3%) = 7% After accounting for the investment's degree of risk and the general market situation, the investor predicts a 7% return on investment. Historical price data for an Australian publicly listed company must be examined in order to calculate the three-year beta. The investor would collect the company's stock prices for the preceding three years, as well as the stock prices of a comparable
MCR006A Financial Management DrupadKumar Hasmukhbhai Patel 1546484 market index, such as the ASX 200. By summing the returns for the company's shares and the market index, the covariance and variance may be derived. The beta coefficient, which represents the corporation's three-year beta, is calculated by dividing the covariance by the variance. It is critical to remember that the accuracy of the calculated beta is affected by the quality of the historical data and the time span of the research. It is also recommended to utilise reliable financial software or seek expert guidance in order to acquire correct and up-to-date data for the computations. The three-year beta reveals significant information regarding the company's sensitivity to market movements. A beta greater than one indicates that the stock is expected to be more volatile than the market, whilst a beta less than one indicates less volatility. Investors may use the beta coefficient to estimate the level of risk associated with a stock and make sensible investment decisions. Finally, the CAPM provides an efficient approach for determining the expected return on an investment based on its risk in relation to the market as a whole. The risk-free rate, beta, and market return are all included while computing the CAPM. By properly determining the beta coefficient, investors may evaluate the degree of risk associated with a certain investment and make better educated selections. Practical application - Calculation of Beta A final requirement is to calculate the three-year Beta for a publicly listed company from those companies listed on the ASX BHP Group Limited is a resource firm that operates in Australia, Europe, China, Japan, India, South Korea, the rest of Asia, North America, South America, and globally. The corporation operates in three segments: copper, iron ore, and coal. Copper, silver, zinc, molybdenum, uranium, gold, iron ore, and metallurgical and energy coal are all mined by the company. The corporation is also active in nickel mining, smelting, and refining, as well as potash development. It also offers towing, freight, marketing and trade, marketing support, financing, administrative services, and other services. BHP Group Limited was established in 1851 and is based in Melbourne, Australia. However,, Inc. sells consumer items and subscriptions in North America and overseas through online and physical locations. It is organised into three divisions: North America, International, and Amazon Web Services (AWS). Products supplied by the corporation through its shops include items and material acquired for resale, as well as products offered by third-party sellers. It also develops and sells electronic products including as the Kindle, Fire tablets, Fire TVs, Rings, Blink, aero, and Echo, as well as developing and producing media content. Furthermore, the firm provides programmes that allow merchants to sell their items in its stores, as well as programmes that enable writers, singers, filmmakers, Twitch broadcasters, skill and app developers, and others to publish and sell content. It also provides computing, storage, database, analytics, machine learning, and other services. To calculate three-year Beta, firstly I selected historical data of the companies and the frequency had been changed to weekly to find it better as there is just a lot of noise using daily. The time period already mentioned is three- year. So I selected three-year of the time period. The only thing that I need onto the excel is adjusted closing price for BHP and AMZN. In order to calculate beta, the important thing is to calculate weekly returns. Returns BHP =Adjusted closing price BHP(B2) / Adjusted closing price BHP(B3) - 1 Returns AMZN= Adjusted closing price AMZN(C2) / Adjusted closing price AMZN(C3) - 1
MCR006A Financial Management DrupadKumar Hasmukhbhai Patel 1546484
MCR006A Financial Management DrupadKumar Hasmukhbhai Patel 1546484 Now two different ways to calculate data has been presented. Slope tool Regression tool Slope tool: - =slope (Known_ Ys, Known_ Xs)
MCR006A Financial Management DrupadKumar Hasmukhbhai Patel 1546484 Regression tool: - go to data analysis in excel, click on regression tool. After that, set the Y range and X range from the Returns BHP and Returns AMZN CFI Team (2022). Capital Asset Pricing Model (CAPM). [online] Corporate Finance Institute. Available at: . Kenton, W. (2022). Beta: Definition, Calculation, and Explanation for Investors. [online] Investopedia. Available at: .
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