Investment Management at Qantas Airlines - Case Study Example

Title; Analysis of risk and returns Table of Contents Title; Analysis of risk and returns 1 Executive Summary or Introduction 3 Project One (Return and Risk) 4 Part one; 4 Part two; the Beta, Alpha and Sharpe Ratio for each stock using the Capital Asset Pricing Model (CAPM) 4 Part three; Portfolio Analysis and decision making 5 Project Two (INDEXES) 5 Part one; three indexes for every month 5 Part two; time series of the three indexes 6 Part three; the expected return and standard deviation of the portfolio 7 Project Three (PORTFOLIOS) 7 Part one; the expected return and risk of each portfolio 7 Part two; the graph of the portfolio 10 Part three; Analysis of the graph 10 Conclusion 10 Reference list 12 Executive Summary or Introduction The report focus on Analyzing the risk and returns for the nine selected stock for different companies in different industries. The risk and returns analysis is an important investment evaluation tool for examining different stocks in terms of returns and risk and providing a conclusion of whether to invest in stock of a company based on the volatility of the returns and returns expected. The report therefore examined the nine stocks for different companies in different industry and conclusion reached on the best investment alternative on the basis of single investment/stand alone investment and an ideal investment alternative based on a portfolio of assets. A Beta (β) measures the volatility of a stock as compared to the market such as the S$P 500. It is a vital tool that appraises the security risks. It therefore appraises the market risk in entirety while standard deviation appraises the risk of specific security. It is an appraisal of the dispersion of data set from the mean where the more the dispersion from the mean, the higher the deviation. Standard deviation is the square root of variance. From our Analysis, We appraised beta by finding the slope of the linear trend line developed by plotting the benchmark return against the equity return. Beta shall be same as the slope of the trend. It can therefore be observed that beta for Air technologies and Mineral resources ltd is 0.6 and 0.81 respectively which is less than 1 implying that our security is less volatile as compared to the markets which therefore ideal for investment. The capital asset pricing model can be defined as ‘a model for ascertaining the risk premium on a security. The model discloses that returns which match to risks are gained under the situation that the capital market upholds balance Project One (Return and Risk) Part one; Woolworth Blackmore ltd Australia and New Zealand Australian Agriculture Dominos pizza JB Hi-Fi Qantas Sonic Healthcare Standard deviation             2.213271 1.91689 17.84382 15.87617 1.234142 0.9338 0.489094 2.4207 correlation coefficients of returns         0.522248 0.522248 -0.1778 -0.3002 -0.0648 0.1129 0.0827 -0.0995 From the above average return for the company, is evident that the standard deviation for Qantas airline is least which would mean that the spread of risk on investment is minimal with high return on investment. It is recommended therefore that an investor should consider making an investment in Qantas airline[WAl07]. Part two; the Beta, Alpha and Sharpe Ratio for each stock using the Capital Asset Pricing Model (CAPM) Woolworth Blackmore ltd Australia and New Zealand Australian Agriculture Dominos pizza JB Hi-Fi Qantas Sonic Healthcare Beta               0.054901 4.96789 0.31711 1.0368 0.7573 0.0060 -0.1362 0.0472 Alpha               4.297482 41.45944 -26.54642 -1.9795 -1.2135 1.0617 -497.6036 -6.7377 Sharpe ratio             -0.3537 -0.18694 -0.11067 -0.3792 -0.0499 0.2490 -1.4694 -0.1171 From the above analysis, it is evident that Qantas Airline is having low risk on investment as measured by the standard deviation with a beta of -0.1362 and Sharpe ratio of -1.469. In this regards, it is recommended that an investment should consider making an investment decision on Qantas airline since, there is low risk on investment in this company[KAr06]. Part three; Portfolio Analysis and decision making Woolworth Blackmore ltd Australia and New Zealand Australian Agriculture Dominos pizza JB Hi-Fi Standard deviation         2.213271 1.91689 17.84382 15.87617 1.234142 0.9338 correlation coefficients of returns     0.522248 0.522248 -0.1778 -0.3002 -0.0648 0.1129 Beta           0.054901 4.96789 0.31711 1.0368 0.7573 0.0060 Alpha           4.297482 41.45944 -26.54642 -1.9795 -1.2135 1.0617 Sharpe ratio         -0.3537 -0.18694 -0.11067 -0.3792 -0.0499 0.2490 From the above five portfolio construction, it is evident that the returns for JB H5 y is ideal since, the risk on investment as measured by the standard deviation is minimal which implies that investing in stocks for this company would lead to high returns and thus, it is recommended that, under the five portfolio above, an investor should consider investing in JB H5 y return[Bou98]. Project Two (INDEXES) Part one; three indexes for every month Part 1 Price Weighted Index weighted index value-weighted index Woolworth -72.012 -13.527 37% Blackmore Ltd -7.665 -128.048 3% Australian and New Zealand -5.919 -235.807 26% Domino Pizzas -0.456 -178.827 10% JB- H5 y 1.068 17.810 3% Qantas -0.108 -0.146 8% Sonic Healthcare -6.691 -480.82 12% Part two; time series of the three indexes From the above graph of time series analysis, it can be observed weighted index depict a high impact on returns for sonic healthcare and low weighted index on stock for Woolworth. The implicating is that, a change in $1 stock will have less impact on the change in index’s value by a bigger amount depicting a little volatility in stocks returns[Asw10]. The price weighed index depict that Woolworth is having the highest negative value of -72.012 which is an indication that the influence of stocks in the index in proportion to the price per share is high unlike price weighted index for other stocks in the graph. Part three; the expected return and standard deviation of the portfolio Woolworth value-weighted index Expected return Standard deviation Blackmore Ltd 37% -71% 1.2986 Australian and New Zealand 3% 267% Domino Pizzas 26% -73% JB- H5 y 10% -41% Qantas 3% -29% Sonic Healthcare 8% -18% The returns of the portfolio above depict a high value with low standard deviation as compared to the price and standard deviation of single stocks investment. The implication is that, an investor should a diversified portfolio since, there will a high value of investment and low risk as measured with the standard deviation since, a portfolio investment would mean risk diversification in term of investment weights[Mic08]. Project Three (PORTFOLIOS) Part one; the expected return and risk of each portfolio Woolworth Qantas Portfolio Average Returns Standard deviation   Average Returns Standard deviation Weight Weight Weighted average Variance Standard deviation -1.87786 2.213270805   6.210036 0.04922 100% 0.0% -1.88 0.51 0.71 -0.71485   0.80872 correlation coefficients of returns 97.5% 2.5% -0.68 0.42 0.65 -1.01665 correlation coefficients of returns   0.889503 0.0827 95.0% 5.0% -0.92 0.42 0.65 -0.77418 -0.528307222   0.854838 92.5% 7.5% -0.65 0.40 0.63 -1.01319   0.765756 Beta 90.0% 10.0% -0.84 0.40 0.63 -1.07303 Beta   0.858481 -0.1362 87.5% 12.5% -0.83 0.38 0.62 1.634724 -0.003742735   0.731803 85.0% 15.0% 1.50 0.37 0.61 -1.01653   0.631033 Alpha 82.5% 17.5% -0.73 0.31 0.56 -0.98742 Alpha   0.75431 -497.6036 80.0% 20.0% -0.64 0.30 0.55 -1.03173 4.356125654   0.599241 77.5% 22.5% -0.66 0.29 0.53 -0.92485   0.726813 Sharpe Ratio 75.0% 25.0% -0.51 0.27 0.52 -1.1105 Sharpe ratio   0.570095 -1.4694 72.5% 27.5% -0.65 0.26 0.51 -0.80372 -0.353695067   0.566912 70.0% 30.0% -0.39 0.24 0.49 -0.79179   0.60759 67.5% 32.5% -0.34 0.23 0.48 -1.14933   0.64642 65.0% 35.0% -0.52 0.23 0.48 -0.99439   0.719346 62.5% 37.5% -0.35 0.20 0.45 -1.05956   0.781224 60.0% 40.0% -0.32 0.19 0.44 -1.53017   1.062471 57.5% 42.5% -0.43 0.17 0.42 -0.95726   1.282176 55.0% 45.0% 0.05 0.14 0.38 -1.01103   1.732831 52.5% 47.5% 0.29 0.14 0.38 -1.04563   1.492831 50.0% 50.0% 0.22 0.15 0.39 -1.04553   1.741461 47.5% 52.5% 0.42 0.15 0.39 -0.95581   1.904542 45.0% 55.0% 0.62 0.17 0.41 -1.11588   1.428327 42.5% 57.5% 0.35 0.18 0.42 -1.19732   1.832827 40.0% 60.0% 0.62 0.19 0.44 -1.81037   2.221209 37.5% 62.5% 0.71 0.21 0.46 -1.89794   1.872264 35.0% 65.0% 0.55 0.23 0.48 -1.27728   2.067467 32.5% 67.5% 0.98 0.25 0.50 -0.77553   2.005209 30.0% 70.0% 1.17 0.25 0.50 -1.55403   1.407398 27.5% 72.5% 0.59 0.17 0.41 -1.71202   1.220321 25.0% 75.0% 0.49 0.18 0.42 -1.74606   0.614236 22.5% 77.5% 0.08 0.20 0.45 -2.6281   0.576168 20.0% 80.0% -0.06 0.27 0.52 0.60774   0.528609 17.5% 82.5% 0.54 0.36 0.60 -3.15321   0.069609 15.0% 85.0% -0.41 0.61 0.78 11.32867   -0.83268 12.5% 87.5% 0.69 -0.78282   Part two; the graph of the portfolio Part three; Analysis of the graph From the above graph of portfolio analysis, it can be observed that there is a strong correlation between the variance of the portfolio and the standard deviation. The minimum variance of the portfolio is at the lowest point of tangent of the variance. It can be observed that the security market line from the above portfolio would be 30. This is lowest point of tangent which implies that, the portfolio investment will not go beyond the point of tangency which at 30 in order for an investment to break even on portfolio investment[Ümi13]. The implication is that, where the security market line is tangent with the graph of portfolio variance, then an investment must consider making an investment at that point since, above the point of tangency, an investor will realize positive returns and at low volatility which is consider ideal investment alternatives. Conclusion It can therefore be concluded that, an investor should consider holding a diversified portfolio in order to minimize risk and guarantee high returns. From our workings and analysis of single investment versus portfolio investment, it can be observed that, a portfolio of asset would lead to high value of returns and low cost on capital which is ideal for investment since, holding portfolio of security will lead to low volatility of the stock and guarantee high returns on investment. where an investor consider on investing a single investment, then a stock with high expected returns and low standard deviation would be good for an investors since, standard deviation is a measure of risk on investment hence, an ideal investment opportunity is the one that would lead to high returns (As measured by expected return) and low risk (as measured by standard deviation). Reference list WAl07: , (Albrecht, 2007), KAr06: , (Aravossis, 2006), Bou98: , (Bourke, 1998), Asw10: , (Damodaran, 2010), Mic08: , (Ehrhardt, 2008), Ümi13: , (Hacioglu, 2013), Read More