# CAPM Model For Analysing Market Risk Over ANZ's Investment

Question :

Investment has been done by various methods as they are very important for adopting for process of decision making. The present study has been discussing about importance of multistage model instead of constant growth model.

• Evaluation of Significance of multistage model instead of constant growth in discounting model
• Application of CAPM model for analysing market risk over ANZ's investment.
• Identification of Difference of Jewellery store and grocery store in context of asset turnover and profit margin
• Calculation of information ratio of every manger
• Examining difference between Fama French model and Capital asset pricing model
Organization Selected : ANZ

## INTRODUCTION

Investment has been done by various methods as they are very important for adopting for process of decision making. The present study has been discussing about importance of multistage model instead of constant growth model. It had shown various calculation for calculating price or value of stock. Further it has articulated various statements for process of decision making about investments.

## QUESTION 1

### (a) Significance of multistage model instead of constant growth in discounting model

Multistage model is given huge importance because of temporarily high rate of growth during valuation of companies. All these specific organization tends for life cycles at early phase because of various opportunities for purpose of reinvestment whose outcome is related to rapid growth and low dividend or it might be no dividends. When these firms get matured, there will be different opportunities for investment and very less numerous so its growth rate will be slowdown (Multistage Dividend discount model, 2018).

### (b) Calculate value of stock along with HPR

Given:

 Risk free rate 6.50% Expected return of market portfolio 13.00% Stock's beta 2.7 Dividends 50.00% Earnings per share 10 ROE 25.00%

 Expected return of stock Rf+B(rm-rf) = 24.05% Value of stock (Return on equity * equity per share) / Required return (a)P1 10.395010395 P0 96 Calculation of dividend D1 51.9750519751 HPR [(D1+P1)/P0]-1 -0.35 (b) -35.03

## QUESTION 2

### (a) CAPM imply on its effect change on ANZ's investment

There is relationship between required rate of return on stock and required rate of return of stock market through its beta. Just for assumption, if ANZ's beta remains constant and if there is raise in market risk then it will give similar effect in required rate of return on market and it will also raise the ANZ's required rate of return.

### (b) Agency problems and approaches to solve it

Agency problems refers to conflict of interest inherent in any specific relationship among management of organisation and its stockholders. It is also known as problem of principal agent or information driven which is asymmetric to conflicts of interests as it is directly inherent static structure of corporate (Ways to resolve agency problems, 2018). There is presence of different approaches to solve agency problems such as:

• Employees should be incentivized
• Segregation
• Arbitration
• Mediation

### (c) Calculation of Arithmetic and geometric average rate of return

 Year (A) Beginning of year price (B) Dividend paid at year end (C) Rate (D) Details (E) Geometric mean (F) 2010 120 2 (PRICE/BASE)-1 D*B B+E 2011 129 2 7.50% 9.675 138.675 2012 115 2 -10.85% -12.48 102.52 2013 120 2 4.35% 5.21 125.21 Arithmetic mean 4.35%

## QUESTION 3

### (a) Difference of Jewellery store and grocery store in context of asset turnover and profit margin

On the basis of asset turnover, jewellery store will gain less asset turnover as compared to grocery store due to reason that grocery store is replicated as fast moving entity but jewellery store is occasional moving. On its contrary, the margin of profit is higher in jewellery store as compared to grocery store.

### (b) Calculation of net asset value or per share of each fund

Given

 Issues 60000 8 per share Liability 8000 Number of shares 60000 / 8 7500

 Stock Shares Price Shares * price Liability Number of shares Net asset value per share Pacific holdings 1200 12 14400 8000 7500 0.85 James Inc 1300 16 20800 8000 7500 1.71 Harvey Corp. 1500 25 37500 8000 7500 3.93 Gabbie Holdings 1000 10 10000 8000 7500 0.26

## QUESTION 4

### (4.1 a) Calculation of information ratio of every manger

 Manager rf rp Information ratio Amanda 0.15 0.95 0.8 0.15 Bryan 0.08 0.42 0.34 0.30 Cassie 0.705 0.075 -0.63 -0.27

### (4.1 b) Calculation of annualised information ratio with context of frequency

 Manager rf rp Annualized information ratio Amanda 0.15 0.95 0.8 1.06 Bryan 0.08 0.42 0.34 0.30 Cassie 0.705 0.075 -0.63 -8.08

### (4.1 c) Ranking managers as per information ratio

 Manager Ranking Amanda 1 Bryan 2 Cassie 3

Interpretation: Usually it determines amount that how much has been exceeded from benchmark. The desired level of consistency has been gained by higher information ratio and vice versa. Amanda high information ratio followed by Bryan and then Cassie (Information ratio, 2018).

### (4.2) Characteristics of S&P /ASX 200 Index

• The main objective for float adjusted market cap is indicated for having index as benchmark which could be traded.
• Low free float stock which are difficult for trade are not considered as benchmark.
• Ensures liquidity.

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## QUESTION 5

### (a) Difference between Fama French model and Capital asset pricing model

Fama French had innovated new multi factor asset pricing model such as three factor model and CAPM determines beta as sole risk factor on basis of returns from expected stock. Fama french model has expanded CAPM through aggregating risk size along with factors of value risk to factor of market risk in capital asset pricing model. The excess return could be easily predicted over risk free rate in Fama french as compared to CAPM. Fama French is time consuming method.

### (b) Difference between Open ended fund and Close ended fund

In the context of capitalisation, open ended fund has unlimited while close ended has constant capitalisation. There are no restrictions for entry and exit but close ended fund has. In open ended funds, sale of specific units is directly done with fund but in close ended, both buying and selling has been traded on stock exchange. In close ended fund, redemption date has been predetermined but in open ended it is not predetermined. Liquidity is higher in open ended funds as compared to other. Open ended funds gives presence of diversification but in close ended units with context of open funds are not present on market line stocks.

### (c) Difference between Private equity fund and Hedge fund

The special focus has been provided to medium or short term liquid securities as it should be easily converted into cash as there is absence of direct control on asset or business of there investing in hedge funds. But in context or private equity, groups are tends towards long hold, strategies of investment in multiple year through assets which are illiquid. There is absence or less control on assets and power of voting in hedge funds whether private equity has huge control and influenced on managing assets and operation for influencing return of long term.

### (d) Information ratio could be considered as benefit cost ratio

For analyzing performance of portfolio it is termed as very important measure.

As its numerator can be indicated as investment on expected return and risk amount which will be denominated as its denominator. It is fully based on ability of investor for analysing available information in context of market and in public domain for taking decision about investing. As its benefit will be gained as benefit by investor because of capability of decision making to investor.

### CONCLUSION

From the above study it can be concluded that, Finance and investment has played major contribution for evaluating its capacity of shares and performance. It has been articulated that Capital asset pricing model is more consistent method as compared to Fama-french three factor model because of time factor as well. It has shown major difference in open and close ended which in which liquidity has been gained by open ended category.

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