Financial Analysis

Financial Analysis

Part 1

Question 1

When we talk about diversifiable risk, it can be explained by the extent to which fluctuations in value of an instrument that are not associated with fluctuations in market value, more generally to instruments of that type in particular. As a result of this, the risk becomes progressively smaller as one portfolio becomes more diversified. However, on the other hand, according to the so-called market model, part of the risk of an entire financial asset that does not depend on fluctuations in the market, but the specifics of one's assets, is called non diversifiable risk. It can refer to a financial asset as a single portfolio. The risk of a portfolio consists of the risk specific and market risk, which really matters to investors, since the other will disappear with a portfolio which is well diversified.

Situation 1

This is an example of non diversifiable risk, as the problem of inflation is being faced by all companies and all the securities which are being traded on the stock exchange of that particular country or region. This risk cannot be diversified through the diversification of portfolio.

Situation 2

This is an example of non diversifiable risk, as the problem of inflation is being faced by all companies and all the securities which are being traded on the stock exchange of that particular country, or region. This risk cannot be diversified through the diversification of portfolio.

Situation 3

This is an example of diversifiable risk, as the problem we are dealing with over here in this case is the lawsuit against one large publicly owned firm. Now this lawsuit might have multiple effects on the stocks of other companies as well which produce and give complimentary goods or services. However, this risk can be avoided by diversifying the portfolio and investing in a different sector of the industry, hence this it contains diversifiable risk.

Question 2

Situation 1

Expected Return = Rf + beta (Rm - Rf)

0.12 = 0.04 + 1.2 (Rm - 0.04)

Rm = 10.66%

Situation 2

Expected Return = Rf + beta (Rm - Rf)

0.09 = Rf + 0.8 (0.10 - Rf)

0.09 = 0.2Rm + 0.08

Rf = 5%

Situation 3

If we closely examine the concept of Beta, we will come to know that it is a measure of the degree to which a given action yields move with the stock market, and is a measure of volatility of a stock relative to the average of an action, i.e. b = 1.0 . It is the key element of the CAPM. Increasing the share in equal proportions to represent market is very volatile action. The beta of a stock measures its contribution to the riskiness of a portfolio; beta is the correct theoretical measure of the risk of an action. A company can change its beta risk through changes in the composition of its assets and using debt financing. Also you can change external factors, such as competition. Now considering this and looking at the scenario which is present over here, it can be said that the beta of the ...