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Financial Modeling

Financial Modeling

Task 1

Introduction

The rates of return play a key role in determining the value of the stock. The required rate of return (RRR) is a component among the metrics and its calculation is used in corporate finance and equity valuation. The required rate of return is the minimum return that an investor looks for, given the entire options that are available and the capital structure of the firm. Moreover, in recent years, there are three basic models through which RRR is calculated. All three methods have unique features for the company. Hence, in this paper we will discuss, which of the three models (dividend growth, CAPM, or APT) is the best one for estimating the required rate of return (or discount rate) for the company. Based on the analysis and findings, one method will be recommended to the board of directors for the company.

This paper will we do Financial Modeling of efficient portfolio and possible ways to reduce risk in the portfolio.

Discussion

Answer 1

Efficient Portfolios

In order to identify a portfolio that gives an expected return of at least 15% whilst minimizes the level of risk. It is necessary to see the probability of each investment in the assets.

Amount to be Invested = £100,000,000

110,000,000 44,000,000 66,000,000

Sr

Share Names

No of Shares

Accepted shares Price of shares

Weight of share in total investmnet

Amount

Beta

Return on Investment

Return on Portfolio

1

A

45000

70

0.029126214

3150000

0.45

25%

0.007281553

2

B

30000

65

0.019417476

1950000

1.42

8%

0.001553398

3

C

30000

90

0.019417476

2700000

0.57

10%

0.001941748

4

D

40000

50

0.025889968

2000000

1.58

3%

0.000776699

5

E

400000

16.36

0.258899676

6544000

1.5

15%

0.038834951

6

F

500000

30

0.323624595

15000000

1.71

12%

0.038834951

7

G

500000

30

0.323624595

15000000

1.6

16%

0.051779935

8

Euro bond

40000000

5

9

10

Total

1545000

1

86,344,000

14.10%

Amount to be Invested = £100,000,000

110,000,000 44,000,000 66,000,000

Sr

Share Names

No of Shares

Accepted shares Price of shares

Weight of share in total investmnet

Amount

Beta

Return on Investment

Return on Portfolio

1

A

45000

70

0.006823351

3150000

0.45

25%

0.001705838

2

B

30000

65

0.004548901

1950000

1.42

8%

0.000363912

3

C

30000

90

0.004548901

2700000

0.57

10%

0.00045489

4

D

40000

50

0.006065201

2000000

1.58

3%

0.000181956

5

E

400000

16.36

0.060652009

6544000

1.5

15%

0.009097801

6

F

500000

30

0.075815011

15000000

1.71

12%

0.009097801

7

G

5550000

30

0.841546626

166500000

1.6

16%

0.13464746

8

40000000

5

9

Euro Bond

10

Total

6595000

1

237,844,000

15.55%

Explanation

Mean variance portfolio is frequently call portfolio optimization. This word is concern with the expected return or mean of the investment and the variance determine the risk related with the portfolio. This numerical problem can be originated in various ways but the main problems can be review as

Minimize risk for a given level of return

Maximize return for a given level of risk

Maximize a utility function that balances between the risk & return through some risk aversion ratio.

These problems possibly will encompass linear or nonlinear constraints, along with equality an inequality constraints. These three problems basically precisely scientifically equivalent and are solve through mean-variance (MV) efficient. In the risk and return graph the efficient points called Efficient Frontier. The above mention problems can be figured out proportional to the present portfolio or standard. Purchasing or developing a new portfolio involves transaction costs; moreover re-balancing portfolio may also involve transaction cost that might constitute a substantial sum to the investor. Few investors optimization schedule can cover costs of transactions and however, they can extensively impress the composition of the portfolio (Fama, Fisher, 1969, pp. 1).

Efficient Portfolios

portfolio dominates another portfolio if the expected return µ is greater than or equal to that of other portfolios, and the standard deviation s ("square root of variance ") of its value is less than or equal to that of other portfolios. It is possible that this is the same ...

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