Analysis Of Risk And Return For Three Australian Companies

The following table demonstrates the average, maximum, and minimum returns of the three companies of Australia:

Average return and maximum & minimum
	CBA Return	RIO Return	WOW Return Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper
Mean	.0007	.0003	.0002
Median	.001	.000	.000
Mode	.000	.000	.000
Std. Deviation	.010	.016	.012
Minimum	-.058	-.075	-.097
Maximum	.037	.089	.082

From the above analysis, it can be observed that the average return of CBA, RIO, and WOW are 0.0008, 0.0003 and 0.00028 respectively, signifying that CBA has the highest return and WOE has the lowest return among the three companies. The mid value of the return of the three companies is 0.001, 0.00 and 0.00 respectively. However, a mode value of return of all the three companies is observed as 0.00, i.e. most often no return has been obtained from the stock of the three companies.

The maximum value of stock return in CBA, RIO, and WOW is observed as 0.037, 0.089 and 0.0824 respectively, which signify that RIO has the highest maximum return and CBA has the lowest maximum return among the three companies. The minimum value of return in the companies are -0.58, -0.75 and -0.98 respectively. It signifies that RIO has the lowest and CBA has the highest minimum return among the companies.

The standard deviation of return for CBA, RIO, and WOW are 0.01, 0.16 and 0.12 respectively, it signifies that there is a high level of similarity with respect to the return of share. There is not much difference with respect to the distribution of return among the three companies.

Distribution of Returns

The following table demonstrates the distribution of return for the three companies

Descriptives
	Statistic	Std. Error
CBA Return	Mean	.0007	.0002
95% Confidence Interval for Mean	Lower Bound	.0001
Upper Bound	.001
5% Trimmed Mean	.0008
Median	.001
Variance	.000
Std. Deviation	.010
Minimum	-.058
Maximum	.037
Range	.095
Interquartile Range	.012
Skewness	-.258	.069
Kurtosis	1.915	.137
RIO Return	Mean	.0003	.0004
95% Confidence Interval for Mean	Lower Bound	-.0006
Upper Bound	.001
5% Trimmed Mean	.000
Median	.000
Variance	.000
Std. Deviation	.016
Minimum	-.075
Maximum	.089
Range	.164
Interquartile Range	.020
Skewness	.151	.069
Kurtosis	1.522	.137
WOW Return	Mean	.0002	.0003
95% Confidence Interval for Mean	Lower Bound	-.0004
Upper Bound	.0009
5% Trimmed Mean	.0002
Median	.000
Variance	.000
Std. Deviation	.012
Minimum	-.097
Maximum	.082
Range	.179
Interquartile Range	.012
Skewness	-.483	.069
Kurtosis	8.757	.137

From the above analysis, it can be observed that the value of Skewness for CBA, RIO, and WOW are -0.258, 0.151 and -0.483 respectively. Since the value of Skewness is near zero, it can be stated that the data of share return is symmetric (Medhi, 2002). Besides, it can also be stated that the share data of CBA and WOW is skewed left and share return data of RIO is skewed right.     

Distribution
	Kolmogorov Smirnov	Shapiro Wilk
Statistic	df	Sig.	Statistic	df	Sig.
CBA Return	.044	1266	.000	.981	1266	.000
RIO Return	.028	1266	.018	.989	1266	.000
WOW Return	.063	1266	.000	.926	1266	.000

The above analysis represents outcome of two evaluation of distribution which is Kolmogorov Smirnov test and Shapiro Wilk test. Since the sample size is more than 50, the Kolmogorov Smirnov test will be appropriate (Ruppert, 2014). From the above table, it can be observed that for CBA, RIO, and WOW, the P values are 0.00, 0.018 and 0.00 respectively which is less than the significance level of 0.05. Therefore, it can be stated that for these three companies the stock market return is normally distributed.        

Portfolio Return and Risk

In order to understand the risk of the portfolio, covariance analysis is undertaken for the stock return of the three companies:

Descriptive Statistics
	N	Range	Variance
CBA_Return	1266	.095	.000
RIO_Return	1266	.164	.000
WOW_Retrun	1266	.179	.000
Valid N (listwise)	1266

From the above analysis, it can be observed that variance is 0.00 for the three companies studied. Low level of variance signifies that there is a low level of volatility in the stock return of the three companies (Vliet, 2017). Therefore, there is low risk in investing in the stock of the three companies.

In order to analyze the portfolio return bivariate correlation analysis is undertaken, as described in the following table):

Distribution of Returns

Correlations
	CBA_Return	RIO_Return	WOW_Retrun
CBA_Return	Pearson Correlation	1	.415	.451
Sig. (2-tailed)		.000	.000
RIO_Return	Pearson Correlation	.415	1	.295
Sig. (2-tailed)	.000		.000
WOW_Retrun	Pearson Correlation	.451	.295	1
Sig. (2-tailed)	.000	.000

From the correlation analysis, it can be observed that the value of correlation coefficient between CBA and RIO is 0.415, which signify that positive relationship exists between the variables, i.e. increase in CBA share return is related with an increase in RIO share return. The value of correlation coefficient between CBA and WOW is observed as 0.451 which also signify positive. Thus, it can be stated that positive relationship exists between the variables and that increase in the return of CBA share is associated with an increase in the return of Wow share price (Marty, 2014). However, the value of correlation coefficient between RIO and Wow is observed as 0.295 which is much lesser than 1. Therefore, it can be stated that positive but very weak relationship exists between the variables.

The regular return of the portfolio can be measured as the following formula       

  On the basis of the formula, the regular return of the portfolio is as follows:

	CBA Return	RIO Return	WOW Return
Annual return	-0.997	-0.997	-0.997
Weekly return	-0.980	-0.980	-0.980

From the above table, it can be observed that the annual return of stock for CBA, RIO, and WOW are -0.99724, -0.99718 and -0.99721 respectively. The weekly return of stock of the companies is -0.9809, -0.9808 and -0.98095 respectively.  

Risk Measure (Sharpe Ratio)

In order to measure the risk of the portfolio investment, Sharpe ratio is computed. It is an important tool to evaluate the performance of an investment by adjusting the risk. This ratio evaluates the additional return per unit of deviance in an investment asset or trading approach, typically termed as risk (Vishwanath, 2009). The Sharpe ratio characterized how effectively the return of stock compensate the shareholder for the risk taken. The following table demonstrates the Sharpe ratio of the three companies with risk-free return of 3%:

Average (CBA)	-2.999
Average (RIO)	-2.999
Average (WOW)	-2.999
Standard deviation (CBA)	0.010
Standard deviation (RIO)	0.016
Standard deviation (WOW)	0.012
Sharpe ratio (CBA)	-282.913
Sharpe ratio (RIO)	-177.072
Sharpe ratio (WOW)	0.016

From the above figure, it can be observed that the Sharpe ratio of CBA, RIO, and WOW are -4.64, -2.93 and 0.017 respectively. This signifies that WOW has the highest Sharpe ratio and CBA has the lowest Sharpe ratio of among the three companies. Therefore, it can be stated that with similar risk category, WOW will give a better return on share in comparison with others and CBA will give the lowest return on the share. Thus, on the basis of Sharpe ratio, WOW is the best stock.   

Value at Risk (VaR)

VaR is regarded as a measurement of risk of investment. It assesses how much a set of investment might lose in specific market situations is a certain time period (Alexander, 2009). This method is characteristically utilized by organizations and regulators in the share market in order to measure the level of assets required in order to cover possible losses.

The following table demonstrates the VaR rate of CBA at 95% confidence level:

CBA
Portfolio value	100
Average return	0.0007
Standard deviation	0.01
Confidence level	0.95
Mean return with 95% probability	-0.015
Value of portfolio	98.432
VaR	1.567

From the above table, it can be observed that the value of VaR is 1.57. This indicates that there is 0.016% probability that the portfolio will fall in value by 100. The following table demonstrates VaR of RIO at 95% confidence level:

RIO
Portfolio value	100
Average return	0.0003
Standard deviation	0.17
Confidence level	0.95
Mean return with 95% probability	-0.279
Value of portfolio	72.070
VaR	27.929

From the analysis, it can be observed that the value of VaR is 27.92 in RIO, this indicates that there is 0.28 probability that the portfolio will fall under 100. The following table demonstrates VaR of WOW at 95% confidence level:

WOW
Portfolio value	100
Average return	0.0002
Standard deviation	0.012
Confidence level	0.95
Mean return with 95% probability	-0.019
Value of portfolio	98.054
VaR	1.945

From the above table, it can be observed that the value of VaR is 1.945 which signifies that there is 0.019 probability that the portfolio will fall under 100.

References

Alexander, C., 2009. Market Risk Analysis, Value at Risk Models. John Wiley & Sons.

Marty, W., 2014. Portfolio Analytics: An Introduction to Return and Risk Measurement. Springer Science & Business Media.

Medhi, J., 2002. Statistical Methods: An Introductory Text. New Age International.

Ruppert, D., 2014. Statistics and Finance: An Introduction. Springer.

Vliet, P. V., 2017. High Returns from Low Risk: A Remarkable Stock Market Paradox. John Wiley & Sons.

Vishwanath, R., 2009. Investment Management: A Modern Guide to Security Analysis and Stock Selection. Springer Science and Business Media.