Business Finance - Final Assessment



Business Finance - Final Assessment

Introduction

Investment activity is one of the most important aspects of the operation of any commercial organization. The origin of this need is due to the investments that are available and should be update. This updation comprises of the technical base material, increasing the volume of production, development of new activities.

This paper focuses on the investment in Treasure Chest Plc large asset management firm based in London. Moreover, the focus would be on evaluation of the potential investments for the new Precious Minerals Fund. The funds which has to be evaluated are BHP Billiton (LSE: BLT.L) and Rio Tinto (LSE: RIO.L) against the FTSE100 index. Furthermore the comparison of each company's expansion plan using NPV, IRR, and Payback investment appraisal techniques will be used along with the risk and return analysis for better an effective investment decision.

Discussion

Risk and Return Analysis

As we know that when a company plans for any investment, the consideration of risk and return analysis is essential. The risk in modern finance is generally associated with the uncertainty (variance, or volatility) as to their income relative to their expected values. Higher risk projects should lead to higher expected rate of return. The observations of investors shows that they are characterized by “aversion” to the risk - that of the two investments have the same expected rate of return that is characterized by choosing less risky (Finch, 2010).

Portfolio

1

2

3

 

BLT

RIO

FTSE 100

 

 

 

 

Standard dev

9.11%

11.42%

3.92%

Variance

0.83%

1.30%

0.15%

Avg. Monthly Return

2.15%

1.69%

0.41%

The above table indicates the risk and return analysis of BHP Billiton and Rio Tinto against the FTSE 100 index. Standard deviation and Variance are representing the risks, comparing both risk with the monthly return it is clear that BLT risk is 9.11% while return is 2.15% whereas Rio risk is 11.42% while return is 1.69%. The highest return comparing with the index is generating by BLT but this company is riskier than the market with 3.92% which means that the investment could leads to huge loose if any fluctuation in price occurs.

Comparing the BLT performance with the performance of RIO, the risk is considerably higher and return is less of RIO. This is clearly indicating that the performance of the RIO share is not up to the market performance. Overall, the risk and return of both the shares with the index is higher while a risk averse investor will go for RIO while risk taker will prefer BLT (Gradl, Youngblood, Componation, & Gholston, 2009).

The above chart is representing the return of BLT against the FTSE 100 index. The return that has been offered by BLT is in line with the return of the index. (See appendix for return calculation). Hence, BLT has been giving more return than the index. This demonstrates that company has enough potential to be competitive in the market with high return to their investors (Niehuss 2010).

The above chart is representing the return of RIO against the FTSE 100 index. The return that has been offered by RIO is in line with the return ...