Prudential Stock and Burberry Stock Return for Whole Year - 275 Words

Financial Accounting for The Prudential Stock and Burberry Stock Return for the Whole Year (Essay Sample) Content: M.Sc MANAGEMENT AND FINANCE Student Name:Institution NameLecturers NameFinance EssayFebruary 2015SECTION 11(a)AnswerSelection of the StockFor the purpose of analysis in this study, the selected stocks are Burberry, London stock exchange group, Easyjet, Prudential and Barclay. The reason for selecting the five stocks is because of the weight of their portfolios and the efficiency of their performance (Galor 2005, p. 37 - 38). The study of the market prices identifies these stocks as the strongest and the most efficient considering the economic factors between 2012 and 2014 as observed by Walker (2014, p. 38). The data gathered for this analysis was taken from the Yahoo Finance library. The stocks assists in the comparison between various prices and the correlations that links the economic variables in the UK market such as the Consumer Price Index, rates of inflation, rates of economic Growth and the Volumes of imports and exports (Fister 2011, p. 40). The two stocks f all into two categories of portfolio; the restricted portfolio and the non-restricted portfolio (Hueting 2011, p. 32 - 33).DiscussionBurberryBurberry is a company belonging to the Fashion industry. It is large because of its portfolio with more than 9000 employees (Martenson 2011, p. 31). It has opened more than 100 branches and subsidiaries in the United Kingdom and beyond. In terms of its financial position, Burberry has a capital of more than GBÃ ¢ 6 billion as estimated by Mandelbrot Hudson (2004, p. 34). The average dividend value during the three years of study is 5% of the shareholders equity (VÃ ¡squez 2008, p. 32). The market share for Burberry in the London Stock Exchange is about 2.8%. London stock exchange groupLondon stock exchange group the stock exchange authority in the UK. It is large because it covers more than 250 companies in the United Kingdom. It has a capital of more than GBÃ ¢ 200 billion. According to Grier (2008, p. 45), the average dividend value durin g the three years of study is 10% of the shareholders equity. EasyjetEasyjet is a company in the aviation industry. It is large having more than 2000 employees and running more than 30 branches in the United Kingdom as stated by Stratton et al (2009, p. 52). Easyjet has a capital of more than GBÃ ¢ 10 billion. The average dividend value during the three years of study is 8% of the shareholders equity as stated by Tobin (1958, p. 28). The market share for Easyjet in the London Stock Exchange is about 7.6% (Shan, McGuin Waller 2007, p. 7).PrudentialPrudential is a company in the financial sector. It is large because of its portfolio with more than 26,000 employees. It has opened more than 120 branches and subsidiaries in the United Kingdom and beyond (Lintner 1965, p. 27). In terms of its financial position, Prudential has a capital of more than GBÃ ¢ 25 billion (Merton 2001, p. 49). The average dividend value during the three years of study is 12% of the shareholders equity. The m arket share for Burberry in the London Stock Exchange is about 3% (Jones 2002, p. 43).BarclayBarclays is a company belonging to the Banking sector. It is large because of its portfolio with more than 150,000 employees (Argyrous, Forstater Mongiovi 2004, p76). It has opened more than 500 branches and subsidiaries in the United Kingdom and other regions. In terms of its financial position, Barclays has a capital of more than GBÃ ¢ 37 billion (Markowitz 1959, p. 43). The average dividend value during the three years of study is 6.7% of the shareholders equity (Bhalla 2010, p53). The market share for Burberry in the London Stock Exchange is about 1.8% (Skaf 1999, p. 58).1(b)AnswerCalculations of Mean Return CalculationLondon stock exchange groupReturn for year 1 (R1) = 0.577Return for year 2 (R2) = 0.25Mean = (R1 + R2) / 2Mean = (0.577 + 0.25) / 2 = 0.4135BurberryReturn for year 1 (R1) = 0.526Return for year 2 (R2) = 0.599Mean = (R1 + R2) / 2Mean = (0.526 + 0.599) / 2 = 0.5625EasyjetR eturn for year 1 (R1) = 0.994Return for year 2 (R2) = 1.164Mean = (R1 + R2) / 2Mean = (0.994 + 1.164) / 2 = 1.079PrudentialReturn for year 1 (R1) = 1.47Return for year 2 (R2) = 1.724Mean = (R1 + R2) / 2Mean = (1.47 + 1.724) / 2 = 1.597BarclayReturn for year 1 (R1) = 0.862 Return for year 2 (R2) = 1.109Mean = (R1 + R2) / 2Mean = (0.862 + 1.109) / 2 = 0.9855Calculations of Standard DeviationLondon Stock Exchange GroupStandard Deviation = (0.414 + 0.34) / 2 = 0.377BurberryStandard Deviation = (0.4577 + 0.512) / 2 = 0.48485EasyjetStandard Deviation = (0.951 + 1.098) / 2 = 1.0245PrudentialStandard Deviation = (1.56 + 1.82) / 2 = 1.69BarclayStandard Deviation = (0.889 + 1.051) / 2 = 0.971 (c)AnswerThe calculation of Covariance and Mean for the Stocks was done in Excel Spread sheet. The results are summarized in the table below. R refers to restricted Portfolio, UNR refers to unrestricted Portfolio and RD refers to the portfolio weight of the Random Distribution (Denney 2005, p62).A. Input s on stocks: mean, standard deviation, and correlation matrixStandardExpectedStockDeviationReturnRD0.30.23UNR0.230.34R0.40.34RDUNRRSt. Dev0.30.230.4Mean0.230.340.34Correlation MatrixRDUNRRRD1UNR1.51R0.31.21B. Covariance MatrixRDUNRRRD0.090.10350.036UNR0.10350.05290.1104R0.0360.11040.16C. Equally-Weighted PortfolioRDUNRRWeights0.33330.33330.33330.33330.010.01150.0040.33330.01150.0058777780.0122666670.33330.0040.0122666670.0177777781.00000.02550.02960.0340Variance0.0892St. Dev0.298645089R * weight0.0766666670.1133333330.113333333Mean0.303333333Minimizing Variance given Mean for portfolioMinimizing the variance in Excel SolverPortfolioRDUNRRWeight-0.71932.7430-0.7237-0.7193365080.046570051-0.2042201120.0187401142.743001587-0.2042201120.398022653-0.219145597-0.7236650790.018740114-0.2191455970.0837905841.3000-0.1 389-0.0253-0.1166Variance0.2808679StDev0.5299697R x weight-0.1654473970.93262054-0.246046127Mean0.521127016Table 1: Correlation And Covariance1(d)AnswerThe CAPM Method uses the formula below to calculate the expected return (ra) using the risk free rate (Feldstein, Hines Hubbard 2007, p. 57) and (Sward 2006, p. 84).ra = rf + Ba (rm - rf)Whererf is the Risk Free RateBa is the beta of the securityrm is the expected market Returnra = rf + Ba (rm - rf)Ba = (ra rf) / (rm rf)17 = 3% + Ba (10% - 3%)0.17 = (0.03 + Ba (0.1 0.3))Ba = (0.17 0.03) / (0.1 0.03)Ba = 2Beta = 21 (e)AnswerLondon stock exchange group = 0.4135Burberry = 0.5625Easyjet = 1.079Prudential = 1.597Barclay = 0.9855London Stock Exchange GroupMean Return ra = rf + Ba (rm - rf)ra = (0.14 + 2(1.2 - 0.7) = 1.14 = 114%The actual mean Return = 0.4135 = 41.35%The stock was overpricedThe suggested action is to is to increase the risk free rate BurberryMean Return = ra = rf + Ba (rm - rf)ra = (0.08 + 2(1. 08 - 0.7) = 0.84ra = 84%The actual mean Return = 0.5625 = 56.25%The stock was overpricedThe suggested action is to is to increase the risk free rateEasyjetMean Return = ra = rf + Ba (rm - rf)ra = 0.2 + 2(1.2 - 0.7) = 1.2ra = 120%The actual mean Return = 1.079 = 107.9%The stock was overpricedThe suggested action is to is to increase the risk free ratePrudentialMean Return = ra = rf + Ba (rm - rf)Mean Return = 0.06 + 2(1.14 0.14)ra = 2.10ra = 210%The Actual Mean return = 1.597 = 159.7%The stock was Under-pricedThe suggested action is to is to reduce the risk free rateBarclayMean Return = ra = rf + Ba (rm - rf)ra = 0.14+2(1.17- 0.17) = 2.14ra = 214%The Actual Mean return = 0.9855 = 98.55%The stock was overpricedThe suggested action is to is to increase the risk free rateSECTION 22(a) AnswerThe two selected Stock are Prudential and Burberry. The portfolios are constructed as shown below.PrudentialPortfolioPortfolioxySt. DevReturn1000.20.370.20.51.70.5480328 0.4540.40.11.50.4782510.4560.61.53.11.05444770.9620.823.81.30883151.21612.54.51.56348971.471.235.21.81830691.724MEAN0.99590851.597Table 2: Portfolio Construction for Prudential
Figure 1: Efficient Frontier for PrudentialBurberry Portfolio weightPortfolioPortfolioxySt. DevReturn1000.20.370.30.20.90.30029990.3070.40.410.35165890.380.50.61.10.40434140.4530.60.81.20.45789080.5260.711.30.51203520.599MEAN0.37103770.5625Table 3: Portfolio Construction for Burberry
Figure 2: Efficient Frontier For BurberryThe Prudential Stock has a return of 1.597The Burberry Stock has a return of 0.5625The total Return for the 2 stocks = 2.1595The total Return for all the stocks = 4.5925Calculation of annual Return = (2.1 / 4.5925) * 100Annual Return = 45.73%This is greater than the 20% expected annual return2(b)AnswerThe selection of the two stocks is because they have a predictable efficiency a.. .