The Performance of MYER against the Market - Case Study Example

The performance of MYER against the market MYER is Australia largest departmental store group. Listed in Australian stock market with its ASX code MYR. The business is in retail industry the company deals with fashion styles and clothing the performance of MYER limited is below those of the market. It can be depicted that the market returns of the security is 1.000 while of the MYER is -1.0408 which therefore implies that the securities of MYER is underperforming. Reason for difference in historic prices between MYER and Market returns the different between the returns of MYER on those of the market is due to company’s disappointment in full year earnings that leads to its tumbled with anticipation that swirling might turn out to be a takeover target for premier ventures . the department stores is facing growing threat from rival companies as well as revitalized local brands that poses a challenge to the sales and margin level and the need to grow the company’s capital venture so as to sustain the returns on equity. The cost of transacting business as a percentage of sales have improved each year for the preceding four years as well as the trend is anticipated to continue. MYER is implementing a credible tactical plan but external pressure threatens to hinder the advantage. The recent downgrade of the company’s financial year 2015 to $ 1.88 implies that the business is overvalued. The company outlook for earning as well as dividend is stunted since it spends more to remain active in the competitive market. Under perfect market, every signal investor have very same information, capital for investment, and technological judgment, there is no arbitrage opportunity. The market equilibrium makes every investor has same market portfolio. Generally, the market portfolio is considered an effective portfolio (Damodaran, 2012). However, the estimation of systematic risk will be wrong, when the incorrect portfolio and market index are chosen. Also, the behavior of market participant as the more important role affects market prices to be informational inefficient .Risk and return of the combined portfolio is assessed by applying mean-variance approach, followed by the portfolio analysis using the regression model (CAPM approach) including the justification of data selection, information of the rationale and calculated results., the recommendation will be provided with consideration of assumptions and limitations under the two approaches and analyzing the results of the calculations. The relation between risk and return is that of an inverse proportion since, the higher the risk of a return, the high the returns and consequently, to capitalize on this and at the same time reduce the risk from the investment, an investor should consider holding a portfolio of securities (Gedde, 2002, p75). Component cost of capital is ideal in ascertaining the value of the firm since, cost of capital provides guideline o calculating the cost of equity as well as cost of debt and consequently the weighted average cost of capital. By doing so, it will be easier in concluding on whether to invest or not an investment project. The business situation therefore affected the market returns of MYER since a rational investor will consider inn a venture with low component cost of capital with high market value. it is eminent that the shares of the MYER limited is overvalued and thus it is risk. this are factors that makes the business situation at risk due to fierce completion from rival partners and thus the company depict different trend in returns unlike those of the market. Returns. C. Investment performance of MYER in five years projection The trend MYER returns ( graph in the Appendices) depict an increasing trend and consequently, it implies that the business investment is increasing which Implies that the return on investment is going to improve. the increasing trend is a good indication that the business performance for MYER limited is improving and thus its shares is going to be overvalued. The expected return for MYER limited is 1.00 which provides a positive return to be realized in the near future. it can s well as be observed from the regression model in the appendix that the volatility of the company’s returns is 0.3895.this amount is positive which implies that the investment returns has a small volatility since, the variability of the returns as anticipated is minimal which provides an indication that the risk of the returns in the future for the business will be small. Investment in this company is acceptable since, a potential investor is going to realize returns from investment in MYER limited due to low level of risk as depicted by the p.values of the returns. Question two Relationship between risk and return The relation between risk and return is that of an inverse proportion since, the higher the risk of a return, the high the returns and consequently, to capitalize on this and at the same time reduce the risk from the investment, an investor should consider holding a portfolio of securities that has the highest value with component cost of capital. Component cost of capital is ideal in ascertaining the value of the firm since, cost of capital provides guideline in calculating the cost of equity as well as cost of debt and consequently the weighted average cost of capital. By doing so, it will be easier in concluding on whether to invest or not an investment project. Risk and return of the combined portfolio is assessed by applying mean-variance approach, followed by the portfolio analysis using the CAPM approach including the justification of data selection, information of the rationale and calculated results. then, the recommendation will be provided with consideration of assumptions and limitations under the two approaches and analyzing the results of the calculations (Ilmanen, 2012. P 215).The assumption holds since, it can be observed from the above data that, the higher the expected return, the higher the risk, this kind of relation between risk and return is that of an inverse since, there is colinearity between risk and returns which implies that the distribution around the mean is less than one as observed. for instance the returns of the Australian shares and international shares depict an increasing trend as observed below. it can be seen that, the more the expected return of a security is, the high the risk if the returns as denoted by the volatility rate. Australian Shares International Shares E(R) 16.99% 20.67% Σ -0.019132609 -2.322966007 2. b (1.1) diversification Diversification is holding a portfolio of asset in different sectors in order to minimize investment risk. An investment will diversity his investment security in different sectors in order to ensure that returns and risk of different security as not consistent hence saving the investor from investment downfall consequential from holding single return investment. The impact that diversification has had on the three portfolios The impact of diversification portfolios that there is a reduction in volatility of the returns and at the same time the reruns of the portfolio returnsa.IN this regards, it can be observed that the holding a portfolio investment returns is ideal since, there is less security risk as depicted by the value of variance and with maximum retains of investment (Stimes, 2011,p 86).There are two justification why we choose the portfolio as an ultimate investment strategy. Firstly, as the expected return of market is high with low cost of capital as depicted in the table for portfolio return and risk. the expected return of market after using CAPM formula (Regression Approach) . The is small fluctuation of in holding portfolio of the expected return of different portfolios .The maximum expected return is 24% with a volatility rate of 0.22314% and the minimum one is -13.3% with volatility rate of 1.5893. Therefore, we can consider the expected returns are almost the different in different portfolio with diverse investment risk thus, at a given level of return, the minimized risk investment in this report should be recommended for a risk adverse investor. Question two 2 c Portfolio x This a class of venture with minimum returns and minimal risk of investment and thus investor in this group tend to depict the traits of less income, non-willingness to expend much of their fund in the investment with fear of losing the entire funds. the right class of customers to be placed in this category of portfolio are the conservative since, they are not willing to tolerate conspicuous downfall of market fluctuation as well as are willing to give up most of entire relevant upside probable’s in relation to the market, to attain their objectives, they really dislike getting their monthly statement and depict their losses as compared to previous cash held (William Megginson, 2008 p289).Many of the conservative customers require their portfolio to provide them with an inflation adjusted income source to imbrues their living cost. they are neither places reliance on the their venture to provide them with a retirement package. they tend to hold majority of their cash as well as high-quality short and intermediate-term maturity bonds. extreme risky asset are characteristically get rid of. fulfilling their needs is rarely to attain where the inflation is extreme or growing since, the market worth of fixed income securities naturally are reducing because of growing interest rate and thus investing defensively will not devoid of risk. It is hard to eliminate entire risk when investing. Investor in this group are deem average in terms of amount to invest and amount to return hard cash, they are both aggressive and conservative since, the fear losing much cash while at the same time require more cash from investment. This class of customer have average cash to spend in investment and thus their risk tolerance is average since, they do not fully invest entire of their cash in investment, their life cycle of investment is deem average as well as. Portfolio y This is a portfolio with small risk and return and thus, customers in this categories will be the moderate investors since, many customer will be desiring to invest in a long-term venture to secure their life after retirement (Stimes, 2011 , p286). A moderate portfolio will hold a balanced mix if very entire key viable investment that neutrals conservatively managed funds. the class of this customers commands huge number of asset to minimize risk and improves the returns. Safety and risky asset class are maximized. the balance between profit or loss minimization is the key objective. Portfolio z This a class of portfolio with highly risky venture with high returns. the investors in this class are the one whom are ready to take on risk in order to increase their returns. the right class of customers to be placed in this type of portfolio are the aggressive customers since, these investors require to substantiality Perform exemplary in the stock market and they must understand that they are exposed to investment risk than the market. they might even loss their portfolio up to more that 35% within a month and it take long to recoup the losses. this kind of investors characteristically hold many economy in entire sector (coefficientl, 2003).Aggresive investors are naturally young as well as tend to contribute comparatively large amount into the portfolio occasionally overtime by the contribution from earned-investment income..they are in need of accumulating large amount of wealth in the future in order to fiancé their living cost as well as remain with plenty of time to work and recover losses. When the, market decline, they will loss substantial large amount of money since, their investment strategy is highly volatile. Investors in this class therefore spends most of their cash in risky portfolio since, there risk tolerance is high and they are in the pick stage of investment life cycle so whatever comes their way either in terms of profit or loss they are willing to take. A rational investor must be risk averse as well as invest in those securities that are highly volatile with high returns and thus it commands the need for huge amount of cash to be a risk taker in this field of investment. Reference Reference list Damodaran, A.2012. Investment Valuation: Tools and Techniques for Determining. New york: Cengage Learing. Gedde, R.2002. Valuation and Investment Appraisal - Page 75. Ilmanen, A.2012. Expected Returns on Major Asset Classes. Stimes, P.C.2011. Equity Valuation, Risk and Investment: A Practitioner's. William Megginson, ‎.S.,2008. Introduction to Corporate Finance - Page 289. Appendices =+LN(M2/M1) Date All Ordinaries Index MYER Market Returns MYER Returns 2009 4882.7 $2.13 0.355457 0.059242834 2010 4846.9 $2.26 -0.4717751 -0.471775109 2011 4111 $1.41 0.24419696 0.244196961 2012 4664.6 $1.80 0.32850407 0.328504067 2013 5353.1 $2.50 0 0 2014  5388.6  $1.40 0 0     Expected Return 0.0761 0.0267     Risk(Coefficients) -0.001 -0.714 Australian Shares International Shares Property Australian Bonds Australian T.Notes Portfolio X Portfolio y Portfolio z E(R) 16.99% 20.67% 8.17% -7.10% -5.72% -13.32% 23.49% 24% Σ -0.019132609 -2.322966007 -2.258415723 -12.27062988 -6.391364485 -1.5893774 0.2231436 -1.589377 MYER returns and Graph MYER Returns 2009 $2.13 2010 $2.26 2011 $1.41 2012 $1.80 2013 $2.50 2014  $1.40 Year Australian Shares Returns International Shares Returns Property Returns Australian Bonds Returns Australian T-notes Returns 1995 20.20% -1.71% 26.50% -136.02% 12.70% 13.25% 18.60% -44.66% 8.00% -5.13% 1996 14.60% -17.96% 6.80% 181.36% 14.50% 33.65% 11.90% 2.49% 7.60% -30.54% 1997 12.20% -5.04% 41.70% -24.62% 20.30% -12.02% 12.20% -25.01% 5.60% -9.35% 1998 11.60% 32.78% 32.60% -62.21% 18.00% 0.00% 9.50% 0.00% 5.10% -1.98% 1999 16.10% -149.79% 17.50% -194.59% -5.00% 0.00% -1.20% 0.00% 5.00% 21.51% 2000 3.60% 103.16% 2.50% 0.00% 17.80% -19.82% 12.00% -78.02% 6.20% -15.68% 2001 10.10% 0.00% -9.40% 105.14% 14.60% -21.29% 5.50% 47.00% 5.30% -9.91% 2002 -8.10% 0.00% -26.90% 0.00% 11.80% -29.33% 8.80% -107.61% 4.80% 2.06% 2003 15.90% 55.15% 0.00% 0.00% 8.80% 115.75% 3.00% 84.73% 4.90% 13.35% 2004 27.60% -26.85% 10.80% 48.84% 28.00% -80.65% 7.00% -18.81% 5.60% 1.77% 2005 21.10% 16.96% 17.60% -35.83% 12.50% 100.06% 5.80% -62.65% 5.70% 5.13% 2006 25.00% -32.85% 12.30% 0.00% 34.00% 0.00% 3.10% 12.14% 6.00% 12.52% 2007 18.00% 0.00% -1.60% 274.49% -8.40% 133.75% 3.50% 144.86% 6.80% 11.12% 2008 -40.40% 0.00% -24.90% 0.00% -32.00% 0.00% 14.90% -217.07% 7.60% -77.54% 2009 39.60% -251.57% 5.00% 0.00% 7.90% 0.00% 1.70% 126.11% 3.50% 22.88% 2010 3.20% 0.00% -0.70% 202.44% -1.10% 31.02% 6.00% 64.19% 4.40% 12.78% 2011 -10.50% 0.00% -5.30% 0.00% -1.50% 0.00% 11.40% -67.40% 5.00% -10.54% 2012 20.26% -0.30% 14.55% 130.45% 33.06% -154.25% 5.81% -217.51% 4.50% -40.55% 2013 20.20% -44.85% 53.63% -96.66% 7.07% 45.11% 0.66% 222.38% 3.00% -10.54% 2014 12.90% 0.00% 20.40% 0.00% 11.10% 0.00% 6.10% 0.00% 2.70% 0.00% E(R)   -16.99%   20.67%   8.17%   -7.10%   -5.72% Σ   -0.01913   -2.322966   -2.258416   -12.2706   -6.391364 Year Portfolio X Returns Portfolio Y Returns Portfolio Z Returns 1995 16.56% -20.58% 10.59% 22.31% 20.59% -3% 1996 13.48% 13.58% 9.15% 22.31% 12.24% 62% 1997 15.44% -14.77% 8.39% 22.31% 22.67% -17% 1998 13.32% -289.04% 7.27% 22.31% 19.18% -44% 1999 0.74% 283.80% 2.76% 22.31% 12.30% -70% 2000 12.64% -22.83% 8.52% 22.31% 6.11% -17% 2001 10.06% -41.85% 6.27% 22.31% 5.15% 0% 2002 6.62% 17.68% 6.30% 22.31% -9.76% 0% 2003 7.90% 90.46% 4.91% 22.31% 9.71% 85% 2004 19.52% -52.56% 8.12% 22.31% 22.64% -21% 2005 11.54% 54.19% 6.40% 22.31% 18.33% 23% 2006 19.84% -249.30% 8.22% 22.31% 22.99% -121% 2007 1.64% 0.00% 4.62% 22.31% 6.84% 0% 2008 -14.92% 0.00% 5.10% 22.31% -34.07% 0% 2009 11.76% -150.92% 3.58% 22.31% 22.88% -297% 2010 2.60% -33.49% 4.17% 22.31% 1.17% 0% 2011 1.86% 235.50% 5.63% 22.31% -7.14% 0% 2012 19.60% -101.12% 7.62% 22.31% 21.11% 27% 2013 7.13% 28.28% 2.94% 22.31% 27.60% -62% 2014 9.46% 0.00% 4.22% 22.31% 14.79% 0% E(R)   -13.32%   23.49%   24% σ   -7.75635   0.2231436   -1.589377 Read More