FINAL ASSESSMENT

Business Finance - Final Assessment



Business Finance - Final Assessment

Introduction

The purpose of this study is to expand the boundaries of our knowledge by exploring some relevant facts and figures related to the rational analysis of the potential investments for the new Precious Minerals Fund. In this paper, the author will provide an investment recommendation based on the analysis of the monthly returns of BHP Billiton (LSE: BLT.L) and Rio Tinto (LSE: RIO.L) from 1 May 2003 through 1 May 2012 for each of the prospective investments. In this paper, the author will interpret the results of the calculations using risk and return analysis, use graphical illustrations to examine the price movements, calculate the beta, covariance and correlation of each company relative to the FTSE100, and determine the required rate of return for each company. Moreover, the author will compare each company's expansion plan using NPV, IRR, and Payback investment appraisal techniques. Based on the investment appraisal analysis, the author will compare and contrast the results and evaluate which company has the most attractive expansion plan.

Discussion

Risk and Return Analysis

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%

If we compare the financial results of BLT, RIO, FTSE 100, it is observed that the highest average return is produced by BLT, however, the standard deviation of 9.11% indicates that the company is riskier than the market (FTSE 100 = 3.92%). On the other hand if we compare the performance of BLT with RIO, the value of standard deviation of RIO is significantly higher than that of BLT, whereas the return of RIO is lesser than that of BLT. This shows the inefficient performance of RIO's stock in market. As a wise investor, it is more beneficial to invest in BLT stocks as it offers high returns at low risk.

Graphical Illustrations

The share price movements of BLT as compared to the FTSE100 movements can be seen in this graph. In this graph, it is observed that BLT has able to maintain its return to the level of returns offered by FTSE 100. This shows that company is performing in line with market trends; there is no abnormal movement in the share price of BLT, which indicates that the company has stability in the performance of its stock in the market.

In this graph, the average rate of returns of RIO is compared with the expected average returns of FTSE 100. The situation in this case is almost the same as it was in the case of BLT, however, the returns of BLT is slightly higher than that of RIO.

Covariance and Correlation

BLT/RIO

 

CORELATION

 

 

63.59%

 

 

 

 

 

 

 

 

COVARIENCE

 

 

0.66%

FTSE 100 / BLT

 

correlation

 

 

69.79%

 

 

covariance

 

 

0.25%

 

 

 

 

 

 

FTSE 100 / RIO

 

correlation

 

 

55.86%

 

 

covariance

 

 

0.25%

 

 

 

 

 

 

Beta BLT

 

 

 

 

1.62

Beta RIO

 

 

 

 

1.63

The correlation between BLT and RIO indicates the strength and direction of association between two random variables as linear relationship. Whereas, if we compare the correlation of FTSE 100 / BLT with FTSE 100 / RIO, it is observed that there is more strength between the variables of FTSE 100 / BLT. The covariance of 0.66% is a common measure of the variation in two variables ...