INVESTMENT PLAN

Intercontinental Hotel Group IHG



Intercontinental Hotel Group IHG

Monthly return on the share price, variance and standard deviation

The monthly return on the share price and FTSE Index is shown in the appendix. And the variance and standard deviation for the share price of IHG and stock index is computed in table below:

Share price

 

 

Mean return

0.02

0.00

Variance

0.01

0.54

Standard Deviation

0.07

7.32

 

 

 

FTSE Index

 

 

Mean return

0.00

0.43

Variance

0.00

0.15

Standard Deviation

0.04

3.88

The expected return derived from the given stock prices ranged from maximum 13.5% and negative 21% in the last quarter of 2010 and 2012. The expected return derived from the FTSE stock Index ranged form 7.5% in the last quarter of 2011 and -7.8% in the second last quarter of 2011. The expected return or mean calculated on the basis of stock price is not significantly differentiating as compare to the Stock Index possessing a few outliers. On average the return of the share price of the IHG is relatively higher than the return offered by the stock index representing the return offered by the market (Krantz, M., 2012, n.d.). It is also evident in the graph below:

Every investment or return on an investment has a certain chance or probability of not receiving actual returns as estimated. Variance and standard deviation are two measures of risk associated to deviation in the return. The variance calculated for stock price return is 0.01 i.e. 0.54% and the variance calculated for stock index FTSE is 0.00 or 0.15%. The standard deviation that measures the degree of volatility and lower the standard deviation better it is. The standard deviation calculated for the stock price is 0.07 or 7.32% and for stock index is 0.04 or 3.88%. Therefore the risk associated to the yielding actual return as expected ones is higher for stock price return as compare to stock index or market.

The logic behind yielding higher returns is the business growth and strong portfolio of assets that yields into higher earning per ratio as it increased from 1.01 in 2010 to 1.86 in 2012 and ability to generate profit from assets efficiently as return on asset increased from 9.86% in 2010 to 17.46% in 2012. Similarly dividend have also increased from 0.45 in 2010 to 0.62 in 2012 that are the predictors of strengthening stakeholders' confidence and increased returns. But the company is also exposed to increased intense competition in the market and higher reliability on USA market only (MorningStar, 2012, n.d.).

Beta of IHG

The beta of the return calculated on given stock prices and stock index movement is calculated to be 1.04. Based on this computation. It can be concluded that the stock of IHG is a slightly volatile as compare to market and its stock values have a tendency to get effected by market fluctuations. It is neither volatile nor less risky in comparison to the market fluctuations. The covariance between the return on stock price and stock index for IHG is calculated as 0.0016, which represents the tendency of moving together by the two variables due to positive value of ...