2021

Financial
Management
Assignment - 1

SUBMITTED BY:

Kayanush Sopariwalla (C-19) Teesta Singh (C-55)

Richa Jha (C-41) Shubham Bisht (C-49)
Rahul Singh (C-37) Milind Singh (C-22)
SUBMITTED TO:
Dr. Arti Chandani
 Risk and Return (along with BETA)
Definitions and Formulas

• Return: A return can be expressed nominally as the change in rupee value of an investment over time and includes dividend and interest payments as
well. Positive return indicates profits while negative returns indicate losses.

P0 = Opening price (Jan 1st)

RETURN (X) = Div. + (P1- P0) P1 = Closing price (Dec 31st)
P0 Div = Dividend received

• Risk: Risk is one of the main components that an investor takes into consideration while investing, as more the risk more are the chances of earning
higher returns. Risk is in respect of volatility of returns that is calculated through standard deviation which is the most accepted method of calculating
risk in the industry. Standard deviation measures how much an investment's returns can vary from its average return.

VARIANCE = Sum of (Return – Avg. Return)^2 STANDARD DEVIATION = √Variance

n-1

• BETA: The beta (β) of a stock is a measurement of systematic risk and indicates volatility of returns relative to the entire market. It is used as a
measure of risk. A company with a higher beta has greater risk and also greater expected returns. Beta of the stock can be negative or positive.

COVARIANCE (m, j) = (Return - Avg Return) * (Return - Avg Return) VARIANCE (m) = (RETURN - Avg RETURN)^2
[(X-xbar) *(Y-ybar)] [(Y-ybar)^2]
n-1 n-1

BETA = Covariance (m, j)

m = Market
Variance (m)
j = Asset
 Asset A (Hero MotoCorp) Rahul Singh (C-37)

Calculation of RETURN and RISK from 2017 -2020

Interpretation

• So here we can clearly observe that the expected return of HERO MOTOCORP is 6.29% but in the year 2018 and 2019 it was negative and
less than the expected returns but in 2020 it gave a very good return to investors. The reason behind this profit was the Covid – 19
outbreak where public transport services were down and public started buying affordable two wheelers which resulted in high sales for
HERO MOTOCORP.

• Now in the above table we can see that standard deviation is pretty high which shows that the stock is volatile and riskier to invest in.
Calculation of BETA from 2017 -2020

Interpretation

• The Beta for the market that is BSE Sensex is always 1 and shows that every time the market goes 1 time up or down, the beta calculate
for the stocks will also move in the same direction.

• In the above table we can see that beta value of HERO MOTOCROP is 2.13 which tells that this asset is 2.13 times as volatile as the overall market and
very riskier for investors who all don’t have a good risk appetite.
 Asset B (Sun Pharma) Teesta Singh (C-55)

Calculation of RETURN and RISK from 2017 -2020

Interpretation

• The expected return for Sun Pharma for the four years was 0.93%, from the years 2017 to 2019 stock didn’t give the investors the
expected return it was negative for 2017 and 2018, in 2019 it was positive but lower than the expected return. In 2020 the stock was able
to generate more than the expected return for the investors. This was mainly due to Covid - 19 pandemic as the demand for medicines
was very high which led to increase in profits and ultimately generating higher returns.

• From the above table and calculation for standard deviation it can be interpreted that the Sun Pharma stock has higher degree of risk as it
has higher volatility due to high standard deviation that is 26.37.
Calculation of BETA from 2017 -2020

Interpretation

• The Beta for the market that is BSE Sensex is always 1 and shows that every time the market goes 1 time up or down, the beta calculate
for the stocks will also move in the same direction.
• For Sun Pharma the Beta is 0.41 indicating that the stock is less volatile as compared to the market beta or we can interpret like when the
market gives return of 10% the Sun Pharma stock will be giving return of 4.14%. Similarly, If the market gives negative returns then sun
pharma stock will also give negative returns by -4.14%.
Standard Deviation tells how spread out the stock price is with
respect to mean. Sun Pharma has a high standard deviation of
26.37%, which shows the volatility of share prices.

Standard Deviation of Hero MotoCop is 27.09%, which

means the share price is volatile, slightly more with
respect to Sun Pharma.
Ø Covariance measures whether stocks move in the same direction (a positive covariance) or in opposite directions (a negative covariance).

The covariance between the two stock returns is 4.17%, because this number is positive, the
stocks move in the same direction. In other words, when SunPharma has a high return, Hero
MotoCop also has a high return.

Ø Covariance can tell how the stocks move together, but to determine the strength of the relationship, we need to look at their Correlation. The correlation
number would always be in the range of -1 to +1. A value of 1 means that the variables always move in the same direction and a value of -1 means the
two always move in the opposite direction.

Here, the correlation is of magnitude 0.5831,

which means the two stocks are moderately
upward (positive) correlated.
 Asset C (TATA Consumer Product Ltd.) Shubham Bisht (C-49)

Calculation of RETURN and RISK from 2017 -2020

Interpretation

• Based On the prices for the year 2017 to 2020 we can notice from preliminary look that the prices have fluctuated a lot but the general
momentum have been in upward direction. This is in line with the return of asset calculation which is 64%. The fluctuation in prices makes
it a risky asset as the risk can be seen at standard deviation of 77.44%.

• It makes it a high risk and high return asset for the duration between 2017-2020.
Calculation of BETA from 2017 -2020

Interpretation

• The calculation Beta gives us an idea of its relative movement with the movement of the Market. The Beta comes to an 8.52 which can be
interpretated that for every movement of the market the asset company will move 80% more than the overall market.
 Portfolio RISK and RETURN Milind Singh (C-22)

PORTFOLIO BETA
The Beta of a portfolio is a measure of the systematic risk of a portfolio with respect to the benchmark index. Beta is calculated by taking the weighted
average of the individual stock Betas present in the portfolio.
We have Sun Pharma and Tata Consumer Products Limited in our portfolio with the ratio of 30%:70% of weightage, respectively. We have used the return of
last four years of both the companies.
We have denoted Sun Pharma as B and Tata Consumers Products Limited as C.
WA is weight of Sun Pharma i.e., 0.3.
WB is weight of Tata Consumer Products Limited i.e., 0.7.

The formula for Portfolio Beta is:

βp = WA*βA + WB*βB +…+ Wn*βn

βp = Σjn=1 (Wj*βj )
Where βp is the Portfolio Beta,
Wj is the weight of the stock in the portfolio and
Βj is the Beta of each individual stock in the portfolio.

The Portfolio Beta is calculated respectively:

The Beta of this portfolio (βp ) from 2016 to 2020 is 6.087 whereas the Market Beta is always taken as 1. Hence by comparing the portfolio Beta with the
Market Beta we can conclude that our portfolio is very highly volatile and very Risky than the market. For every 1 Rupee change in price of the Market our
portfolio will change by 6.087 Rupee Only on both the positive and negative side.
PORTFOLIO RETURN:
The portfolio return is calculated as a weighted average of the returns of the companies in the portfolio . We Have two companies in our portfolio namely
Sun Pharma and Tata Consumer Products Limited in the ratio of 30% : 70% of weightage.

To calculate the portfolio return we have:

Rp = w1*R1 + w2*R2 +…+ wn*Rn

Rp = Σj=1n (wj*Rj)
Where Rp is the return of the portfolio
Rj is return of the asset
Wj is the weight of the asset.

The portfolio return is calculated below:

The return given by our portfolio (Rp ) from 2016 to 2020 is 45.56% whereas the return given by BSE Sensex during the same time period is 13.18%. Hence,
we can conclude that our portfolio has overperformed and have deliver very good returns than the benchmark Sensex.
PORTFOLIO RISK
The risk of a portfolio is the overall risk of each stock that the portfolio comprises of, this is dependent on the weight of each stock, their variance, standard
deviation and the correlation between the stocks in the portfolio.
The risk of a portfolio can be calculated as:

σp = √wB2*σB2 + wC2*σC2 + 2*wB*wC*rBC*σBσC

where σp is the portfolio risk

σA2 is variance of Sun Pharma.
σB2 is variance of Tata Consumer Products Limited.
rAB is correlation between both the stocks.
σA is the standard deviation of Sun Pharma.
σB is the standard deviation of Tata Consumer Products Limited.

The risk of the portfolio is calculated as:

σp = √0.32*0.26372 + 0.72*0.77442 + 2*0.3*0.7*0.34*0.2637*0.7744

σp = .574 or 57.4%
The Portfolio standard deviation is 57.4% which means our portfolio can give returns in the range of 9.31% ± 57.4% for its 1 Standard Deviation. Whereas the
portfolio Risk of BSE Sensex is only 9.99%.
Overall, we can conclude that our portfolio has given higher return than Sensex but has higher Risk than Sensex in the period of 2016 to 2020.