Managerial Finance

Section A: Background & review of literature

You are required to review the literature on the topic of investment. Review a minimum of 10 peer-reviewed journals on the topic of investment relating to risk and return for this assessment.

Pesaran & Yamagata (2018) while examining the return series based on student t tests of individual securities stated that Sharpe-Lintner CAPM may not be effective in predicting the financial crisis period. They found a “negative correlation between a twelve-months moving average p-values of the test and excess returns of long/short equity strategies (relative to the return on S&P 500) over the period November 1994 to June 2015” Pesaran & Yamagata (2018, P.1).

Pesaran, H. & Yamagata, T. (2018) Testing for Alpha in Linear Factor Pricing Models with a Large Number of Securities, Working Paper revised version January 2018, retrieved from 

Select any one technology company from the list given in the next page, Table 1. Look at the S&P/ASX 200 Information Technology Index from the ASX website (

Provide the background of the organisation including, but not limited, to the following:

  1. History
  2. Products/Services
  3. Location(s) of business activities
  4. Market Share
  5. Directors
  6. Latest P/E Ratio
  7. Dividend Policy
  8. Environmental Impact and Policy
  9. Beta as given in literature

Table 1: List of Selected Information Technology Companies

 Company Open High Low Last close Volume
Altium Limited (ALU) $28.04 $28.04 $28.04 $28.04 1,440,042 Limited (CAR) $15.17 $15.17 $15.17 $15.17 1,570,448
Computershare Limited (CPU) $11.70 $11.70 $11.70 $11.70 3,568,164
Domain Holdings Australia Limited (DHG) $2.64 $2.64 $2.64 $2.64 1,729,573
IRESS Limited (IRE) $11.18 $11.18 $11.18 $11.18 633,258
Link Administration Holdings Limited (LNK) $4.02 $4.02 $4.02 $4.02 16,190,345
MYOB Group Limited (MYO) $3.40 $3.40 $3.40 $3.40 6,983,260
NEXTDC Limited (NXT) $8.19 $8.19 $8.19 $8.19 3,210,483
REA Group Ltd (REA) $95.35 $95.35 $95.35 $95.35 386,053
Technology One Limited (TNE) $7.13 $7.13 $7.13 $7.13 1,894,220
Wisetech Global Limited (WTC) $14.03 $14.03 $14.03 $14.03 2,128,118
Xero Limited (XRO) $73.94 $73.94 $73.94 $73.94 934,059

Section B: Share price statistics and basic estimation of average return

 Record on the excel spreadsheet:

The monthly closing price history of the chosen company as well as the S&P/ASX 200 INFORMATION TECHNOLOGY Index

    • over the period 2 Jan 2010 to 1 Jan 2015 – the first time period:
    • over the period 2 Jan 2015 to 1 Jan 2020 – the second time period
  1. Calculate the monthly returns of the company as well as the S&P/ASX 200 INFORMATION TECHNOLOGY Index for the first time period.
  2. Estimate the monthly returns of the company as well as the S&P/ASX 200 INFORMATION TECHNOLOGY Index for the second time period.
  3. Using the formulae provided in your text book, estimate the average return, market capitalisation, P/E ratios using the excel functions for both the periods.
  4. Prepare line graphs plotting the share price history of the company and the S&P/ASX 200 INFORMATION TECHNOLOGY Index for the first period as well as the second period.
  5. Draw 2 histograms of monthly returns of the company for the first period and the second period. Examine to what extent the returns are normally distributed.
  6. Discuss your observations, the similarities and the differences between the 2 periods average return and the S&P/ASX 200 INFORMATION TECHNOLOGY Index.

C. Risk analysis using CAPM

  1. Why do you think standard deviation may be a reliable predictor of risk? Give pros and cons of using standard deviation as a predictor of company’s risk?
  2. Estimate the variance and standard deviations of monthly returns of the company as well as the S&P/ASX 200 INFORMATION TECHNOLOGY Index for both the time periods.
  3. Discuss what it tells about the risk as measured by the standard deviation of the l company and the S&P/ASX 200 INFORMATION TECHNOLOGY Index.
  4. How does the risk of the company compare with that of the market S&P/ASX 200 INFORMATION TECHNOLOGY Index for both the periods?
  5. Calculate the risk premium (Beta) for both the periods using CAPM measures
    1. Calculate the covariance for both the periods and comment on the extent to which they relate.
    2. Provide an explanation for Beta for both the periods.
  6. If you think Beta to be a better measure of risk premium, why do you consider it to be so. Discuss.

Are there any variations between Beta as given in literature and your estimates of Beta for the 2 periods? Discuss your answer based on your findings.

 Section D: Changes and recent developments

Provide a commentary of current and recent (within the last year) developments relating to the company.

Focus on changes that have had an impact on the share price of the company, including but not limited to development and changes relating to:

  1. Capital structure
  2. Legislative changes impacting the company.
  3. Competitive pressures.
  4. International events.
  5. Major suppliers and customers.
  6. Management and ownership changes.

Section E: Investment recommendation

Make a recommendation as to whether you would buy, sell or hold the shares based on your findings. Your recommendation can include suggested share price levels but should be based on the analysis in sections A-D.