Corporate Finance for Capital Asset Pricing Model †Free Sample

Question: Discuss about the Corporate Finance for Capital Asset Pricing Model. Answer: Introduction The report is intended to compare and contrast the market expected return of the two-portfolio value. For the purpose of the comparison, the two traded stock of Bank West and Clip Industries have been shown in this report. Primary the report shows the mean expected returns of the selected companies, coefficient of variation for the market with Bank West and Clip Industries and the beta value of the of both the companies. Portfolio Expected Rate of Return The calculation of the expected rate of return of the portfolio has been done with average rate of return ( , ) of both Bank West and Clip Industries. and are considered as the mean expected return of the share prices of both the portfolios. The expected average return of both the portfolios has been observed to be 183.61 and 21.18. denotes the mean value of the market. The investment is made in equal proportions both the values of and will be 0.5. Denotes the expected rate of return, the formula used for expected rate of return assuming equal weights is Portfolio Expected Rate of Return ( ) = [ x ] + [ x ] = [0.5 x 183.61] + [0.5 x 21.18] = 102.40 or 2.4% Calculation of portfolio's risk The portfolio's risk is calculated by computing the Covariance () and then by calculating the value of the Standard Deviation , ) Of portfolio is calculated by using the formula = + + 2 ) Where, and are the proportion of the portfolio that is to be invested in the asset : is the standard deviation of risk : is the correlation coefficient value Calculation of Expected returns from both the portfolio Month Bank West Percentage change Clip Industries Percentage change Percentage change Market Index 1 2.37 1.05 5.08 2 1.37 11.9 5.08 3 1.3 -1.5 5.5 4 7.71 -7.37 1.19 5 1.14 13.26 -1.79 6 1.51 -0.7 -1.62 7 6.29 6.42 -1.13 8 3.88 9.87 5.09 9 8.26 -0.47 8.1 10 0.61 -3.17 0.84 11 0.12 5.12 1.7 12 0.9 -15.58 2.74 13 10.83 18.81 6.03 14 10.31 9.84 5.71 15 35.37 -2.12 8.64 16 22.64 -10.67 11 17 7.31 -7.72 0.49 18 2.22 -17.83 7.9 19 10.51 -1.84 7.25 20 3.76 3.44 0.88 21 19.47 -1.31 6.17 22 5.99 2.23 3.67 23 8.93 7.42 2.08 24 10.81 2.1 1.56 The final risk value of both the portfolio is 5.75% Beta Coefficient calculation of both the companies Calculation of Beta and rate of return (CAPM) Month Bank West Percentage change Clip Industries Percentage change Percentage change Market Index 1 2.37 1.05 5.08 2 1.37 11.9 5.08 3 1.3 -1.5 5.5 4 7.71 -7.37 1.19 5 1.14 13.26 -1.79 6 1.51 -0.7 -1.62 7 6.29 6.42 -1.13 8 3.88 9.87 5.09 9 8.26 -0.47 8.1 10 0.61 -3.17 0.84 11 0.12 5.12 1.7 12 0.9 -15.58 2.74 13 10.83 18.81 6.03 14 10.31 9.84 5.71 15 35.37 -2.12 8.64 16 22.64 -10.67 11 17 7.31 -7.72 0.49 18 2.22 -17.83 7.9 19 10.51 -1.84 7.25 20 3.76 3.44 0.88 21 19.47 -1.31 6.17 22 5.99 2.23 3.67 23 8.93 7.42 2.08 24 10.81 2.1 1.56 a 1.26 b -0.53 Risk Free Rate (Rf) 1.59% 1.59% (As per Government Bond yield rate for two years) Expected market return Bank West (Rm1) 92.16 Expected market return of Clip Industries(Rm2) 92.16 Required rate of return 116.11 -49.17 Graphical Representation The graph shows the changes in the share price of each month. Bank West seem to be performing better in terms of the expected returns Conclusion As per the quantitative evidence of the risk reduction it can be concluded by saying the lower beta value of the clip industries suggests that portfolio returns are less volatile in the market hence the risk is expected to be low in terms of the investors point of view. On the other hand the expected return on the shares of the West Bank is expected to be higher. Although as per the CAPM model, the required rate of return of the clip industries is on the lower side. Hence, an investor should look forward to invest in the share of the Bank West. Reference List Ai, H., Croce, M.M. and Li, K., 2013. Toward a quantitative general equilibrium asset pricing model with intangible capital. Review of Financial Studies, 26(2), pp.491-530. Barberis, N., Greenwood, R., Jin, L. and Shleifer, A., 2015. X-CAPM: An extrapolative capital asset pricing model. Journal of Financial Economics, 115(1), pp.1-24. Dempsey, M., 2013. The capital asset pricing model (CAPM): the history of a failed revolutionary idea in finance?. Abacus, 49(S1), pp.7-23. Fama, E.F. and French, K.R., 2015. International tests of a five-factor asset pricing model. Fama-Miller Working Paper.