Section B: Measuring Company's Performance in Periods 1 and 2

Section B: Measuring Company's Performance in Periods 1 and 2

Question 3

Price Graph

The diagram below shows the price graph of WBC against the overall benchmark (S&P/ASX 200) over the entire sample period.

Question 4

The return graph for WBC and the market benchmark (S&P/ASX 200) which covers 31/12/2007 to 26/12/2011 were plotted in two periods (period 1 and 2) and are depicted in the graphs below. Period 1 covers the weeks from 31/12/2007 to 28/12/2009.

Legend:

Market Wide Events

Company Specific Events

Period 2 covers the weeks from 28/12/2009 to 26/12/2011.

Legend:

Market Wide Events

Company Specific Events

Question 5

From the above graphical representation of Return S&P/ ASX200 in Period 1, company's Period 1 return, S&P/ ASX200 return in Period 2 and company's return in Period 2, it can be observed that the trend of the market and company has been indifferent as in the period 1, it is observed that the return of company is based on the performance of the market as the return of the Westpac Group depends on the market position. However, in the Period 2, to some extent, opposite trend is observed as the increase in the Westpac Group return in not based on the market as at the time of increase in Westpac Group return, the market return of S&P/ ASX200 in period 2 decreased.

Question 6 and 7

The profitability of a Westpac Group is affected by two types of risk(Brigham & Houston, 1998): A risk to himself or "specific" depending on the specific characteristics of the entity or issuer, the nature of their productive activity, management competence, financial soundness ect. and this risk is also known as "non-systematic or diversifiable" and a second type of risk, called "Systematic or Market", which does not depend on individual characteristics of the title, but other factors (general economic conditions ) that affect the behavior of prices in the stock market(Johnson, 1971). This second type of risk is also referred to as "non-diversifiable", it will not be possible to eliminate through diversification, given the correlation between the profitability of the title in question with the returns of other securities through the Stock Index that summarizes market developments(Cohen & Zinbarg, 1967).

When an investor of Westpac Group buys securities on the stock market to reduce risk, diversification makes sense if the returns of different securities purchased are not correlated, or have varying degrees of correlation with the market index of S&P/ ASX200. The best known model to estimate the profitability and risk of securities is the "market model" of Sharpe, which underlies the "Diagonal Model"(Brentani,2004). In this model the statistical dependence of linear type between the profitability of the securities and the General Index(Statistics, 2010).

One of the criteria for the classification of financial assets is based on the beta or Sharpe ratio volatility. By this criterion, financial assets are generally classified into three groups or categories(Brigham & Houston, 1998):

Assets "low volatility" or "defensive" which are those whose beta or volatility coefficient is less than unity.

Assets "very volatile" or "aggressive", which are ...