Finc5001 group assignment
Executive Summary
Telstra Limited (TLS) is Australia's leading telecommunications and information services company, with one of the best known brands in the country. It offers a full range of services and competes in all telecommunications markets throughout Australia. (Telstra Financial Report, 2009) Ansell Limited (ANN) is a global leader in barrier protective solutions. It designs, develops and manufactures a wide range of hand and arm protection solutions, clothing and condoms (Ansell Financial Report, 2009). This report uses mean-variance method and CAPM approach, to form the portfolio combined two stocks TLS and ANN. By justifying five years (2005-2010) monthly data in using mean variance method to calculate the expected return (ANN 0.007488, TLS -0.004441), standard deviation (ANN 0.076531, TLS 0.053729), as well as beta (ANN 0.64, TLS 0.31). And then one year (2009) daily data to determine portfolio expected return in using CAPM method. With MV method, based on the justification and limitation, this report have not choose a optimize portfolio but only choose the portfolio number 29 with the smallest risk. However, under CAPM model, in evaluating the combination of its expected return and the beta, the report recommended portfolio number 29 based on 4 reasons. Firstly, the daily expected return calculated by CAPM model is much higher than daily risk free rate. Secondly, TLS is undervalued due to the SML. Thirdly, because the market is in dramatic change recently and low beta means low relation with market, so the number 29 is the most proper portfolio.
1.0 Mean Variance
According to Lai and Li (2008), the core of the MV is to take the expected return of a portfolio as the investment return and the variance of a portfolio as the investment risk. Consequently, the first step to using this method is to calculate the individual expected return and variance.
1.1 Data Selection
The data selected for calculate the individual expected return and variance is
Telstra Limited (TLS) is Australia's leading telecommunications and information services company, with one of the best known brands in the country. It offers a full range of services and competes in all telecommunications markets throughout Australia. (Telstra Financial Report, 2009) Ansell Limited (ANN) is a global leader in barrier protective solutions. It designs, develops and manufactures a wide range of hand and arm protection solutions, clothing and condoms (Ansell Financial Report, 2009). This report uses mean-variance method and CAPM approach, to form the portfolio combined two stocks TLS and ANN. By justifying five years (2005-2010) monthly data in using mean variance method to calculate the expected return (ANN 0.007488, TLS -0.004441), standard deviation (ANN 0.076531, TLS 0.053729), as well as beta (ANN 0.64, TLS 0.31). And then one year (2009) daily data to determine portfolio expected return in using CAPM method. With MV method, based on the justification and limitation, this report have not choose a optimize portfolio but only choose the portfolio number 29 with the smallest risk. However, under CAPM model, in evaluating the combination of its expected return and the beta, the report recommended portfolio number 29 based on 4 reasons. Firstly, the daily expected return calculated by CAPM model is much higher than daily risk free rate. Secondly, TLS is undervalued due to the SML. Thirdly, because the market is in dramatic change recently and low beta means low relation with market, so the number 29 is the most proper portfolio.
1.0 Mean Variance
According to Lai and Li (2008), the core of the MV is to take the expected return of a portfolio as the investment return and the variance of a portfolio as the investment risk. Consequently, the first step to using this method is to calculate the individual expected return and variance.
1.1 Data Selection
The data selected for calculate the individual expected return and variance is