Japan Airlines Analysis - Case Study Example

Japan Airlines Analysis Name Tutor Unit Code Date Introduction The present day investors are faced with numerous investment options, which they can put their money into to earn a return. However, shares and bonds remain the top investment options for many investors. There are also innumerable companies and funds in which investors can choose to invest in. Therefore, analysis of the performance of company’s shares as well as bond performance is vital for investors. It forms a basis for financial decision making. Besides, investors are so much concerned as regards the riskiness of their investments. Some investment options, such as shares, are regarded as very risky whereas others, such as bonds, are associated with low risk levels. In some instances investors prefer to combine different investment portfolios through diversification so as to reduce the risk levels. In this report, I analyse the performance of Japan Airline’s shares and the performance of the Vanguard Total Bond Market Index (VBMFX) from June 2012 to December 2014. The aim of the analysis is to find the portfolio standard deviation and determine the investment option that has performed well over the period under consideration. This is to assess the riskiness of investing in both options assuming that the options have equal weighting. The portfolio standard deviation is an important indicator of the combined investment portfolio risk level. First I give a background of Japan Airlines and the VBMFX. Japan Airlines Japan Airlines was established in 1951. It became the national flag carrier of Japan in 1953. It is also one of the world's leading carriers. The company’s headquarters is in Shinagawa, Tokyo. The airline’s key operating hubs include Tokyo International Airport (Haneda Airport), Narita International Airport, Kansai International Airport, Osaka International Airport, among others. Japan airlines is a member of the Oneworld Alliance, which it joined in 2007. Frequent flyers earn points on the alliance’s Mileage Bank Frequent Flyer Programme (JAL, 2015). In 2002, the Japan Airlines merged with Japan Air System, allowing it to grow into Japan’s third largest airline and the sixth largest airline globally by passengers serviced. The company’s other subsidiaries include Japan Transocean Air (51.1 per cent), JAL Express, JAL Cargo, Ryukyu Air Commuter and Japan Air Commuter (60 per cent). Today Japan Airlines has a fleet of up to 192 airplanes and flies to over 220 destinations. Its operations include both scheduled and non-scheduled air transport (passenger and cargo) services. The airline services over 50 million passengers each year. The airline offers discounted domestic air fares for people visiting Japan under the new “Japan Explorer Pass”. The company offers up to four cabin classes on its international flights. These include First Class, Executive (Business) Class, Premium Economy and Economy. The company also offers First Class, Executive (Business) Class travel on some selected domestic flights (Oneworld Alliance, 2015). In 2014, Japan Airlines posted revenues amounting to 13.4 billion Japanese Yen. Its assets as at 2014 were valued at 14.7 billion Japanese Yen. The company employs over 10,000 people directly. Vanguard Total Bond Market By and large, bonds are an investment opportunity whereby investors simply loan a government, government agency, or corporate entity some money to fund their projects or for other needs. The issuer of the bond agrees to repay the one providing the money at a fixed interest rate by a specified date, or at maturity. The Vanguard Total Bond Market Index (VBMFX) is a common bond market mutual fund. In fact it is the biggest bond mutual fund globally. VBMFX ousted Pimco Total Return (PTTRX) from the first position after clients pulled out, mainly, the departure of Pimco lead fund manager and co-founder, Bill Gross (Morningstar.com, 2015). The VBMFX is based on investments of a broad, market-weighted bond index. It integrates a wide range of public, taxable, investment-grade, fixed income securities, which include corporate, government, and international dollar-denominated bonds, plus other asset-backed securities and mortgage-backed -all with maturities of over one year. The VBMFX uses an indexing investment style premeditated to trail the performance of the Barclays Aggregate Float Adjusted Index. All of the fund’s investments are chosen through a sampling process. VBMFX asset base is grounded on a diverse base of long-term investors in quest of a low-cost central bond holding. VBMFX encompasses over 16,000 bond holdings, all long positions. Basically, over 80 per cent of the fund’s assets are invested in bonds held in the index. VBMFX is a managed passively (Vanguard, 2015). Even though past performance is no guarantee of future results, the Vanguard Total Bond Market Index is largely expected to continue posting dependable, index-hugging performance. Objective The aim of the analysis is to find the portfolio standard deviation and determine the investment option that has performed from June 2012 to December 2014. This is to assess the riskiness of investing in both options assuming that the options have equal weighting. The portfolio standard deviation is an important indicator of the combined investment portfolio risk level (Steven, 2006). Methodology The study adopted a descriptive research design. The design is appropriate in presenting the findings in a concise manner with reduced bias. Besides, the results can be presented in an understandable form, using tables and graphs. The study used secondary data that was collected from the respective website for both Japan Airways and the Vanguard Total Bond Market Index (VBMFX). The data was analysed using the Microsoft Excel software. Finding and Analysis Below I indicate the steps to finding the portfolio standard deviation. Step 1: Computing the Expected Returns and the Standard Deviation Table 1: Returns Standard Deviation Standard Deviation JAL 0.025 VBMFX 0.002 The table 1 above indicates that the standard deviation for the expected returns on Japan Airways is 0.025 and the standard deviation for the expected returns on Vanguard Total Bond Market Index is 0.002. Step 2: Computing the Correlation Table 2: Correlation Matrix   JAL VBMFX JAL 0.000654 VBMFX -0.000001 3.93808E-06 From table 2 above, the correlation coefficient for Japan Airways and the Vanguard Total Bond Market Index is -0.000001. Step 3: Computing the Portfolio Standard Deviation The portfolio standard deviation is calculated using the formula below: Where, ωA = weight of asset A in the portfolio; ωB = weight of asset B in the portfolio; σA = standard deviation of asset A; σB = standard deviation of asset B; and ρ = correlation coefficient between returns on asset A and asset B. 0.013 = 1.3 % The results indicate that the riskiness of investing in a two-asset portfolio of Japan Airlines and the Vanguard Total Bond Market Index is low at 1.3 per cent. It would therefore be advisable to invest in the portfolio (Edmonds et al., 2006). Conclusion Diversification in important in reducing the riskiness of an investment portfolio. In the above analysis, a two-asset portfolio is analysed to determine the risk level of investing in the portfolio. The results show a low risk level at 1.3 per cent. At such a low risk level, it would be appropriate to invest in the two-asset portfolio. References Edmonds, C Edmonds, T Olds, P & Schneider, N, (2006). Fundamental Managerial Accounting Concepts, New York, McGraw-Hill Irwin. JAL, (2015). About Us. Retrieved 10 December 2015, https://www.jal.com/en/outline/corporate/company.html Morningstar.com (2015). Vanguard Total Bond Market Index. Retrieved 10 December 2015, http://www.morningstar.com/funds/XNAS/VBMFX/quote.html Oneworld Alliance, (2015). Japan Airlines. Retrieved 10 December 2015, https://www.oneworld.com/member-airlines/japan-airlines-jal Steven, M.B. (2006). Financial Analysis: A Controller's Guide, 2nd ed. Wiley. Vanguard (2015). Retrieved 10 December 2015, https://personal.vanguard.com/us/content/Funds/FixIncOVContent.jsp Read More