Company Financial Analysis - Assignment Example

Task 1

When analyzing the personally calculated beta and the beta provided by Morningstar, the most crucial thing to check is the time frame given (Li and Todorov, 2016). It is clear that the time frame provided by the beta calculated by Morningstar is unknown while the calculated beta like the one we have just calculated is well known to us using that is from the year 2013 August 31 to 1st September 2016. It is quite unique as it provide the end users a given time frame through which they gauge the riskiness of their investment (Kahn and Lemmon 2016). Long term investors will obvious require to gauge the investment over long period of time while short term investors would wish to do this over a short period of time (Kahn and Lemmon 2016). Therefore, the one calculated here is in better position for the end users to choose compared with already calculated. From our calculation, the calculated beta is:-

Covariance

0.000505

variance

0.021818

Beta

0.023131

This indicates that the calculated beta is 0.023131 while given beta is 0.034 indicated that given beta is more riskier compared to the calculated beta therefore, it is difficult to make conclusion as per the given beta simply because it is as from which period when the stock was riskier unlike we know very well that in the calculated when we can estimate the time period when the stock was riskier (Roll et al., 2013).

It should be noted that most given beta are calculated using the American standards that of S&P 500 index but in this case, we are using FTSE 250 of the United Kingdom. Therefore, in circumstances like in our case where the equities extends beyond U.S. borders, given beta would not be the best measure for determining how risky a stock is (Kahn and Lemmon 2016). Therefore, the calculated beta of 0.023131 in this case of JRP group is better placed for investment decision purposes (Kahn and Lemmon 2016).

When you calculate beta on your own, you are is a better place to determine the reliability of the beta you are calculating through the determination of coefficient of determination or the so called r-squared (Li and Todorov, 2016). This is a crucial tool that can enable one to know how well the beta you have established measure the risk. On the other hand, given beta, an analyst is not able to establish how reliable the beta is because you may not understand the process through which it was calculated through (Kahn and Lemmon 2016).

It should be noted that most given beta are calculated using the capital asset pricing model (CAPM) which in most cases bases their argument on theoretical basis rather than practical basis. We have used regression technique which normally allow for better explanation of returns concerning the market rather than the theoretical explanation of the overall stock return as used in the capital asset pricing model (Kahn and Lemmon 2016).

Nevertheless, self-calculated beta involve so many things which consume time and requires a lot of accuracy in the process. Since the given beta are machine generated, the probability of their accuracy is higher compared to self-calculated beta (Roll et al., 2013). Therefore, there is certainty that you are accurate on the beta you have calculated since they also depend on the secondary data.

Task II

From the excel 2 it shows the JRP group/FTSE 250 price relative. From the data analysis, the first value of relative price is 0.7724 varies increases in circumstances the JRP value is more than FTSE 250 and declines when the JRP Group value is less than FTSE 250 (Li and Todorov 2016). On the relative percentage change, that of the JRP group is less than the percentage change in FTSE 250.

The company price relative help in in establishing the price relative strength which assist in stock selection process. The portfolio manager will be able to compare the company performance against the bench mark like in this case, the JRP group is better than the market benchmark of FTSE 250.

Since the goal of every portfolio manager is to outperform the benchmark, and relative price. The price relative rises when a stock shows relative strength and is outperforming its benchmark. Conversely, the price relative falls when a stock shows relative weakness and is underperforming its benchmark (Roll et al., 2013).

The trend line are shown in the figure below including the trend line equation on the relative price differences between FTSE 250 and the JRP group stock prices.

The price shows the movement of stock prices and the changes are indicated above. The outperformance is clear in specific dates as shown above (Kahn and Lemmon 2016).

The stock relative price can also be used in the general market analysis. It can be used through breaking down the stock into different sectors. The chartist’s graphs can be used of the comparison between the market leader and the market laggard (Kahn and Lemmon 2016). From the analysis, the JRP group can be classified as market leader due to the fact that it outperforms the market indicators. Kahn and Lemmon (2016) states that market is classified as offensive in circumstances when the technology and consumer discretionary sectors are in the lead. At the same time, it is in defensive mode in circumstances when consumer staples, healthcare and utility sectors are in the lead. In our case, the market is in defensive mode since JRP group is within the utility sector (Li and Todorov, 2016). Therefore, we can conclude that the company is in the right direction and the portfolio managers here are performing extremely well as compared with the industry based indicators (Roll et al., 2013). The investors should consider investing in the JRP group using the price relative performance index.

Task III

In comparing the stock performance in short term and long term, the short term beta seems less riskier comparing with long term analysis of beta (Li and Todorov 2016). Therefore, based on the beta, the short term analysis provides good estimates since it is less risky compared with the long term. The analysis is shown in the table below:-

Long term

Short term

Covariance

0.000505

-0.0023538

variance

0.021818

0.03788808

Beta

0.023131

-0.0621242

This also indicate that the short term investment might have lower return due to the fact that it is less riskier while long term investment have higher return due to higher risk involve. Bollerslev Li and Todorov (2016) states that the investment with higher returns tends to be more risky than ones which are less risky. It is quite unique as it provide the end users a given time frame through which they gauge the riskiness of their investment hence long term and short term beta analysis.

Reference

Bollerslev, T., Li, S.Z. and Todorov, V., 2016. Roughing up beta: Continuous versus discontinuous betas and the cross section of expected stock returns. Journal of Financial Economics, 120(3), pp.464-490.

Kahn, R.N. and Lemmon, M., 2016. The Asset Manager's Dilemma: How Smart Beta Is Disrupting the Investment Management Industry. Financial Analysts Journal, 72(1), pp.15-20.

Roll, G., Harbell, J., Posselt, A., Freise, C., Kang, S.M., Hirose, R., Szot, G., Feng, S. and Stock, P., 2013, September. Long Term Follow Up for Beta Cell Replacement Therapy in HIV Infected Patients with Renal Failure Secondary to Type I Diabetes Mellitus. In TRANSPLANTATION (Vol. 96, No. 6, pp. S111-S111). 530 WALNUT ST, PHILADELPHIA, PA 19106-3621 USA: LIPPINCOTT WILLIAMS & WILKINS.