FINANCIAL MANAGEMENT PROJECT REPORT ON TOPIC: RISK AND RETURNS

Annual data of stock prices

LIBORD FINANCE LTD. Indbank Merchant Banking Services Ltd.
(Stock 1) (Stock 2)
Stock
Stock price
Year price Year
(Close)
(Close)
2018 6.2 2018 9.34
2019 5.7 2019 7.00
2020 3.47 2020 11.10
2021 7.94 2021 21.95
2022 5.81 2022 24.30

iii) BSE INDEX

(Market Index)
Market
Year index
(Close)
2018 36,068.33
2019 41,253.74
2020 47,751.33
2021 58,253.82
2022 61,624.15
Solution:
Stock 1
Stock
returns of
Year price X- X bar (X-Xbar)^2 (X-X bar)(Y-Ybar)
stock X
(Close)
2018 6.2 0 -0.10961 0.012014319 0.031123014
2019 5.7 -0.08064516 -0.19026 0.036196969 0.101687292
2020 3.47 -0.39122807 -0.50084 0.250838621 -0.151138209
2021 7.94 1.288184438 1.178575 1.389038063 0.81738142
2022 5.81 -0.26826196 -0.37787 0.142787107 0.066838754
X bar= 0.109609848 1.830875079 0.865892271

Stock 2
Stock
returns of
Year price Y- Y bar (Y- Ybar)^2 (R-R bar)(Y-Ybar)
stock y
(Close)
2018 9.34 0.00 -0.28 0.080624 0.032884419
2019 7.00 -0.25 -0.53 0.285668 -0.014940331
2020 11.10 0.585714286 0.30 0.091066 0.012583771
2021 21.95 0.977477477 0.69 0.480989 0.072209099
2022 24.30 0.107061503 -0.18 0.031287 0.010251602
Y Bar= 0.28 0.969634 0.11298856

BSE Market Index

Market returns of
Year index market index R -R bar (R- R bar)^2 (R-R bar)(X-Xbar)
(Close) R
2018 36,068.33 0 -0.11581 0.0134127 0.012694269
2019 41,253.74 0.14376629 0.027953 0.000781375 -0.005318213
2020 47,751.74 0.157512992 0.0417 0.001738872 -0.02088483
2021 58,253.82 0.219930834 0.104118 0.010840479 0.122710383
2022 61,624.15 0.057855948 -0.05796 0.003359045 0.021900417
R bar= 0.115813213 0.03013247 0.131102024

1. What is the arithmetic mean of the allotted stocks? Based on arithmetic returns, if you
have been given a chance to invest in either of the stocks, which stock you will prefer to
invest and why?
Ans:
Arithmetic return of stock 1: 0.10961
Arithmetic retrun of stock 2: 0.28
I would prefer investing on stocks of ADVANCE LIFESTYLE LTD as they are having
higher arithmetic returns

2. What is the geometric mean of both the stock returns?

Ans:
Geometric mean of stock return1: Couldn't find geometric mean as few stock returns are negative
Geometric mean of stock return2: Couldn't find geometric mean as few stock returns are negative

3. Define and calculate the variance and standard deviation for the given stocks, also write
an interpretations?
Ans:
Variance and standard deviation measure the volatility of asset returns. Greater the
volatility, the greater the uncertainty.
Variance= Σ(R-Rbar)^2/ N-1
Standard deviation of return risk refers to dispersion of returns around an expected value.
The most common statistical measure of risk of an asset is the standard deviation from the
mean/expected value of return.
Standard devistion= √ variance

Variance of stock 1= 0.45771877 Variance of market return= 0.007533

Standard deviation of stock 1= 0.693206 Standard deviation of market return=
0.114166
Variance of stock 2= 0.24240844
Standard deviation of stock 2= 1.06751

Expected Risk of stock 2 is more than stock 1

4. Calculate covariance between Stock-I and Stock-II; Stock-I and Market Index; Stock-II and
Market Index and write an interpretations from the findings.
Ans:

Covariance of stock 1 and stock 2= 0.216473068

Covariance of stock 1 and market index= 0.032775506
Covariance of stock 2 and market index= 0.02824714

5. Estimate Beta (β) value of Stock-I and market Index; Stock-II and market index. Which
stock is more sensitive to the market returns?
Ans:

Beta (x,r)= cov(x,r)/variance of market return= 4.350855572

Beta (y,r)= cov(y,r)/variance of market return= 3.749727812

As Beta value of Stock 2 is more, So Stock 2 is more sensitive towards the market returns.