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Corporate and International Finance

Assignment No.1

RISK ANDMARKET ANALYSIS OF TWO

COMPANIES THAT OPERATE IN DIFFERENT

SECTORS OF THE UK ECONOMY.(BY CAPM AND

BETA VALUE)

SUBMITTED BY:

ANOOP SAXENA K0226432

Page 1 of 25



SUBMITTED TO:

Dr Yongsheng Guo

Contents

Introduction

Companies’ profile

• Tesco profile• Royal Bank of Scotland

What is Beta?

Calculation of beta for Tesco

Calculation of beta for Royal Bank of

Scotland Required rate of return

Calculation of expected rate of return

Significance and assumption of CAPM

Acceptability or Implication of CAPM

Page 2 of 25



Conclusion

Reference

Bibliography

Appendix

Introduction

In the mid-1960s, the three economists- William

Sharpe, John Lintner, and Jack Treynor, found the

simple equation to calculate the risk and expected

return on the investment of capital. This model or

equation is known as the Capital Asset Pricing Model

(CAPM). Capital Asset Pricing Model (CAPM) is themodel used to describe the relation between the risk

and expected return on the investment. It helps the

investors to determine the appropriate price of the

investment

Ri=Rf+βRm-Rf

Ri = rate of expected return

Rf = risk free return (treasury bills, libor rate)

Rm =rate of market return

= beta value of company

Page 3 of 25



CAPM is a simple but powerful model. Moreover it takes

into the basic principles of portfolio selections:

• Efficient portfolios (Maximize excepted return

subject to risk).

• The highest risk premium to standard deviation is

a combination of the market portfolio and the risk-

free asset.

• Individual stocks should be selected on their

contribution to portfolio risk.

• Beta measures the marginal contribution of the

stock to the market portfolio.

Page 4 of 25



Companies’ profile

Tesco profile

Tesco is one of the major grocery retail company. With

its subsidiaries, it operates in various foods, non-food,

and other retailing services. The Tesco is the third-

largest retailer in the world measured in terms of

revenue, after Wal-mart and Carrefour. And second

largest in terms of profit after Wal-mart. There are

more than 4811 stores across the globe( United

Kingdom, the Republic of Ireland, Hungary, Poland, the

Czech Republic, Slovakia, Turkey, Thailand, South

Korea, Malaysia, Japan, China, India, and the United

States).

The company was founded by Jack Cohen in 1919. And opens its first store in 1929 in Burnt Oak, Edgware,

Middlesex. The store operates over 40,000 product

line. The store operates in multi-store formats across

the United Kingdom. The stores sales all kinds of

products that includes food, non food, wines and

spirits, electrical equipments, home entertainment,

cosmetics, pharmaceutical products and clothing’s and others products.

Royal Bank of Scotland

The Royal Bank of Scotland Group plc, through its

subsidiaries, offers banking and financial services to

Page 5 of 25



personal, commercial, corporate, and institutional

customers in the United Kingdom, the United States,

and internationally. Royal Bank of Scotland has around 700 branches, mainly in Scotland though there are

branches in many larger towns and cities

throughout England and Wales. It provides private

banking and investment services, and offshore banking

services; and debt and equity financing and risk

management services, as well as money markets,

currencies and commodities, equities, credit marketsand portfolio management and origination services.

The company also offers global payments, cash and

liquidity management, and trade finance and

commercial card products and services; sells and

underwrites retail and SME insurance over the

telephone and Internet, as well as through brokers and

partnerships; and offers general insurance, includingmotor insurance under the brands of Direct Line,

Churchill, Privilege, Green Flag, and NIG. In addition, it

provides operational technology, customer support in

telephony, account management, lending and money

transmission, global purchasing, property, and other

services. The company was founded in 1727 and is

headquartered in Edinburgh, the United Kingdom. TheRoyal Bank of Scotland Group plc operates as a

subsidiary of HM Treasury

What is Beta?

Page 6 of 25



“The market risk is measured by Beta; it shows the

sensitivity of the return is to the market movements.

Beta measures the risk of an asset relative to theaverage asset. By definition the average assets have

the beta value 1, relative to itself.”

Beta can be defined as – “a quantitative measure of

the volatility of a given stock, mutual funds, or

portfolio, relative to the overall market. Specifically,

the performance of the stock, fund, or portfolio has

experienced in the last 5 years as the market moved

1% up or down. A beta above 1 is more volatile than

the beta whose value is less than 1.”( investorwords)

Beta value of a stock can take one of the followingforms.

1.Negative Beta – This is a rarity, and means the

stock is moving just reverse to the market.2.Zero (0) Beta – This means the value of the stock

stays same irrespective of market movement. Again a rarity.

3.Beta between 0 and 1 – This means the stock priceswing less compared to market movements. Many blue chip company stocks and high-liquidity stockshave beta less than one. In a long-term

prospective these stocks fall under low-risk low- profit category.

4.Beta of 1 – This means the stock price moves inthe same relation with the market. This can be thecase with many index-related products.

5.Beta greater than 1 – This means the stock priceswings more compared to market movements.

Page 7 of 25



Many growing companies and technology companies have beta greater than one. Most of these stocks fall under high-return high-risk category. Also remember, beta at very high levels

probably indicates high price volatility because of low-liquidity.

Formula of beta( β )

β=cov(rs,rm)var(rm)

rs=rate of return of stock(for given time)

rm=rate of return of market(for given time)

Calculation of beta for Tesco

The beta of Tesco is calculated by the use of excelslope formula.

DateAdj Close

tesco lAdj Closeftse 100

return of tesco

return of ftse100 beta of tesco for 5yrs

(B3/B4-1) (C3/C4-1)slope(return of

tesco,return of market)

01-12-2010 425 5899.90.025826

696 0.06721777 0.783190952

01-11-2010 414.3 5528.3

-0.029401

429 -0.02588455

01-10-2010 426.85 5675.20.006721

698 0.022816566 beta for year2010

01-09-2010 424 5548.60.045339

119 0.061892368 0.616389636

02-08-2010 405.61 5225.20.038295

149-

0.006238113

01-07-2010 390.65 52580.027891

067 0.069372979 beta for year2009

01-06-2010 380.05 4916.9

-0.076652

089-

0.052328271 0.50795073404-05-2010 411.6 5188.4 -

0.054119-

0.065708678

Page 8 of 25



269

01-04-2010 435.15 5553.3

-0.000688

942-

0.022237482 beta for year2008

01-03-2010 435.45 5679.60.037526

805 0.060715286 1.156637854

01-02-2010 419.7 5354.5

-0.011423

861 0.031993833

04-01-2010 424.55 5188.5

-0.008060

748-

0.041456521 beta for year2007

01-12-2009 428 5412.90.011820

331 0.042807328 1.008567269

02-11-2009 423 5190.7

0.035521

065 0.02898206

01-10-2009 408.49 5044.50.022247

247-

0.017413662 beta for year2006

01-09-2009 399.6 5133.90.063048

683 0.045835116 0.24431558

03-08-2009 375.9 4908.90.023274

806 0.065207013

01-07-2009 367.35 4608.40.038885

747 0.084533559

01-06-2009 353.6 4249.2

-0.030967

388-

0.038185563

01-05-2009 364.9 4417.90.082147

094 0.041049085

01-04-2009 337.2 4243.70.011397

72 0.080894526

02-03-2009 333.4 3926.10.000600

24 0.02506462

02-02-2009 333.2 3830.1

-0.069793

412-

0.076995373

02-01-2009 358.2 4149.6 -0.005-

0.064182942

01-12-2008 360 4434.20.219099

221 0.034095149

03-11-2008 295.3 4288

-0.129935

18-

0.020400704

01-10-2008 339.4 4377.3

-0.124355

005-

0.107129016

01-09-2008 387.6 4902.50.015989

515-

0.13023808701-08-2008 381.5 5636.6 0.058546 0.0415196

Page 9 of 25



06 14

01-07-2008 360.4 5411.9

-0.024099

648

-0.03803835

8

02-06-2008 369.3 5625.9

-0.108186

428

-0.07063682

2

01-05-2008 414.1 6053.5

-0.034731

935

-0.00555254

401-04-2008 429 6087.3

0.131926121

0.067554059

03-03-2008 379 5702.1

-0.053682

896

-0.03096375

1

01-02-2008 400.5 5884.3

-0.039568345

0.000765332

01-01-2008 417 5879.8

-0.126244

107

-0.08937725

5

03-12-2007 477.25 6456.9

-0.003653

4450.00379323

7

01-11-2007 479 6432.5

-0.018442

623

-0.04301059

3

01-10-2007 488 6721.6

0.110984633

0.039401249

03-09-2007 439.25 6466.8

0.033529412

0.025938794

01-08-2007 425 6303.3

0.042305334

-0.00893067

7

02-07-2007 407.75 6360.1

-0.025686

977

-0.03750056

8

01-06-2007 418.5 6607.9

-0.087738

42

-0.00203884

4

01-05-2007 458.75 6621.4

-0.008108

1080.02670098

602-04-2007 462.5 6449.2

0.041080473

0.022384274

01-03-2007 444.25 6308

0.028356481 0.0221178

01-02-2007

432 6171.5 0.033492823

-0.00509422

Page 10 of 25



7

01-01-2007 418 6203.1

0.033374536

-0.00284529

301-12-2006 404.5 6220.8

0.033865815

0.028435392

01-11-2006 391.25 6048.8

-0.005717

916

-0.01311753

602-10-2006 393.5 6129.2

0.093055556

0.028251241

01-09-2006 360 5960.8

-0.045725

6460.00926161

101-08-

2006 377.25 5906.1

0.049374

131 -0.0037447503-07-2006 359.5 5928.3

0.076347305

0.016268386

01-06-2006 334 5833.4

0.042121685

0.019148118

01-05-2006 320.5 5723.8

0.022524247

-0.04969201

9

03-04-2006 313.44 6023.1

-0.031815

6550.00980786

6

01-03-2006 323.74 5964.6

-

0.023673814 0.02988863

01-02-2006 331.59 5791.5

0.062890663

0.005416385

02-01-2006 311.97 5760.3

total (Σ)0.421934

1920.09018803

7

The values of beta for Tesco are as follows:-

YEAR BETA VALUE OF TESCO

2006-10 0.783190952

2010 0.616389636

Page 11 of 25



2009 0.507950734

2008 1.1566378542007 1.008567269

2006 0.24431558

Tesco

The Tesco share is less volatile. This means the stock price swing less compared to market movements.The company stocks and high-liquidity stocks havebeta less than one. In a long-term prospective thesestocks fall under low-risk low-profit category. By keeping the share of Tesco in our portfolio, we canminimize the risk of loss. But on the other hand wealso play down the possibility of making good profit

in short period of time. The share of Tesco is good to play for long term/long period, say more than 2 years. But it not good for the professional traders,who use to buy and sales share on daily basis.

Tesco share is good for the general public, smallinvestors, and the peoples who don’t want to takethe risk on their investment. It is not 100% safe asthe Treasury bill, LIBOR rate or any other government securities.

Calculation of beta for Royal Bank of Scotland

The beta of Royal Bank of Scotland is calculated by the use of excel slope formula.

Date

AdjCloserbs l

Adj Closeftse100

returnof rbsl

return of ftse100 beta for 5yrs

Page 12 of 25



(B3/B4-1) (C3/C4-1)

slope(return of RBS,return of FTSE)

01-12-2010 39.07 5899.9

0.0393722

0.06721777 2.232457592

01-11-2010 37.59 5528.3

-0.15736

4

-0.0258845

5

01-10-2010 44.61 5675.2

-0.06301

20.0228165

6601-09-

2010 47.61 5548.60.06796

770.0618923

68 beta for year2010

02-08-2010 44.58 5225.2

-0.10768

6

-0.0062381

13 1.528353377

01-07-2010 49.96 5258 0.2058895 0.069372979

01-06-2010 41.43 4916.9

-0.11341

8

-0.0523282


04-05-2010 46.73 5188.4

-0.14020

2

-0.0657086

78 3.20285309

01-04-2010 54.35 5553.3

0.2352273

-0.0222374

8201-03-

2010 44 5679.6

0.16803

82

0.0607152

86 beta for year200801-02-

2010 37.67 5354.50.16625

390.0319938

33 1.870793735

04-01-2010 32.3 5188.5

0.1061644

-0.0414565

21

01-12-2009 29.2 5412.9

-0.11995

20.0428073


02-11-2009 33.18 5190.7

-0.20981

20.0289820

6 0.594055001

01-10-2009 41.99 5044.5

-0.20698

8

-0.0174136

62

01-09-2009 52.95 5133.9

-0.08152

60.0458351

1603-08-

2009 57.65 4908.90.28539

580.0652070

13 beta for year200601-07-

2009 44.85 4608.4 0.150590.0845335

59 1.073393588

Page 13 of 25



01-06-2009 38.98 4249.2

0.0204188

-0.0381855

63

01-05-2009 38.2 4417.9

-

0.086124

0.041049085

01-04-2009 41.8 4243.7

0.7061224

0.080894526

02-03-2009 24.5 3926.1

0.0560345

0.02506462

02-02-2009 23.2 3830.1

0.0545455

-0.0769953

73

02-01-

2009 22 4149.6

-0.55465

6

-0.0641829

42

01-12-2008 49.4 4434.2

-0.10669

10.0340951

49

03-11-2008 55.3 4288

-0.18074

1

-0.0204007

04

01-10-2008 67.5 4377.3

-0.62290

5

-0.1071290

16

01-09-

2008 179 4902.5

-0.23748

7

-0.1302380

8701-08-

2008 234.75 5636.60.10861

870.0415196

14

01-07-2008 211.75 5411.9

-0.01511

6

-0.0380383

58

02-06-2008 215 5625.9

-0.05908

1

-0.0706368

22

01-05-2008 228.5 6053.5

-0.33768

1

-0.0055525

4401-04-

2008 345 6087.3 0.022980.0675540

59

03-03-2008 337.25 5702.1

-0.12402

6

-0.0309637

5101-02-

2008 385 5884.30.00785

340.0007653

32

02-01-2008 382 5879.8

-0.13964

-0.0893772

55

Page 14 of 25



03-12-2007 444 6456.9

-0.03268

0.003793237

01-11-

2007 459 6432.5

-0.11132

6

-0.0430105

9301-10-

2007 516.5 6721.6-

0.016190.0394012

49

03-09-2007 525 6466.8

-0.08616

20.0259387

94

01-08-2007 574.5 6303.3

-0.03038

-0.0089306

77

02-07-

2007 592.5 6360.1

-0.06398

1

-0.0375005

68

01-06-2007 633 6607.9

0.0087649

-0.0020388

44

01-05-2007 627.5 6621.4

-0.02410

60.0267009

86

02-04-2007 643 6449.2

-0.02723

10.0223842

74

01-03-

2007 661 6308

-0.01195

8 0.0221178

01-02-2007 669 6171.5

-0.01762

1

-0.0050942

27

02-01-2007 681 6203.1

0.0256024

-0.0028452

9301-12-

2006 664 6220.80.08319

740.0284353

92

01-11-2006 613 6048.8

-0.01446

9

-0.0131175

3602-10-

2006 622 6129.20.01633

990.0282512

4101-09-

2006 612 5960.80.03204

050.0092616

11

01-08-2006 593 5906.1

0.0224138

-0.0037447

503-07-

2006 580 5928.3-

0.020270.0162683

8601-06- 592 5833.4 0.03135 0.0191481

Page 15 of 25



2006 89 18

02-05-2006 574 5723.8

-0.03691

3

-0.0496920

19

03-04-2006 596 6023.1

-0.04487

20.0098078

6601-03-

2006 624 5964.60.07082

180.0298886

301-02-

2006 582.73 5791.50.09843

360.0054163

8503-01-

2006 530.51 5760.3

total()

-

1.411822

0.090188037

market return (%) rm 9.018804

treasury bill rate (%) 5years rf 2.24

expected rate of returnRj

17.37339

The values of beta for Royal Bank of Scotland are asfollows:-

YEAR BETA VALUE OF RoyalBank of Scotland

2006-10 2.232457592

Page 16 of 25



2010 1.528353377

2009 3.20285309

2008 1.870793735

2007 0.594055001

2006 01.073393588

The Royal Bank of Scotland share is more volatile incomparison of Tesco. This means the stock priceswings more compared to market movements. Many growing companies and technology companies havebeta greater than one. Most of these stocks fall under high-return high-risk category. Also remember, beta at

very high levels probably indicates high price volatility because of low-liquidity.by keeping the share of RoyalBank of Scotland in our portfolio, we can maximise the

profit. But on the other hand we also increase the possibility of making good loss in short period of time.The share of Royal Bank of Scotland is good to play for short term/short period, say less than six month. But it is good for the professional traders, who use to buy

and sales share on daily basis.Royal Bank of Scotland share is not good for thegeneral public, small investors, and the peoples whodon’t want to take the risk on their investment.Because it is very volatile and it can’t be trusted.

Page 17 of 25



The comparison of the beta value of Tesco and Royal Bank of Scotland.( on the basis of each year)

Year TESCO ROYAL BANK OF SCOTLAND

2006-10

0.783190952 2.232457592

2010 0.616389636 1.528353377

2009 0.507950734 3.20285309

2008 1.156637854 1.870793735

2007 1.008567269 0.594055001

2006 0.24431558 01.073393588

Year Tesco Royal Bank of Scotland

2006 The share of Tesco is very lessvolatile.

The share of Royal bank of Scotland is volatilebut near to the idealcondition.

2007 The beta valuethe share reachesnear to the ideal

market situation

The share valuebecomes less volatile.

2008 Due to therecession period the share valuebecomes morevolatile.

Due to the recession period the share valuebecomes more volatile.

Page 18 of 25






Rf = risk free return (treasury bills, libor rate)

Rm =rate of market return

= beta value of company

The risk free rate of return can be described as the rate

of return with zero risk. It is the rate of interest an

investor gets or would expect from absolute risk free

investment over a specified period of time. Thetreasury bills, LIBOR rate is considered as the risk free

rate of return.

Calculation of expected rate of return

• Royal bank of Scotland

Ri=Rf+βRm-Rf


Rf = 2.24% (treasury bills)

Rm =9.018804

= 2.232457592

Ri=2.24+2.232457592(9.018804-2.24)

Ri= 2.24+ 2.232457592* 6.778804

Ri= 2.24+ 15.13339245447997

Ri= 17.37339245447997

The excepted rate of return of the Royal Bank of Scotland is 17.37339245447997%. The investors of

Page 20 of 25



the Royal Bank of Scotland expect the rate of return onthe investment is about 17.37%

TescoRi=Rf+βRm-Rf


Rf = 2.24% (treasury bills)

Rm =9.018804

= 0.783190952

Ri=2.24+0.783190952 (9.018804-2.24)

Ri= 2.24+ 0.783190952* 6.778804

Ri= 2.24+5.309097958181408

Ri= 5.309097958181408

The excepted rate of return of the Tesco is

5.309097958181408 %. The investors of the Tescoexpect the rate of return on the investment is about 5.31%

Significance and assumption of CAPM

The greatest advantage of Capital asset pricing model(CAPM) is the idea that risk-return relation of every

portfolio can be optimized to attain lowest risk for a

specific level of return. Many investors following CAPM prefer to invest in low-cost index funds rather than onstocks. CAPM necessitates diversification of portfolio. It helps the investor to select the portfolio of its choice,whether they want to invest in low risk shares or highrisk share. Or they can manage their portfolio by keeping some volatile and some less volatile shares.

Page 21 of 25



Assumptions

1. If investors agree on the distribution of asset

returns.2. If Investors have the same fixed (static) investment horizon.3. Investors hold efficient frontier portfolios.4. There is a risk-free asset:

• paying interest rate rF • in zero net supply.

5. Demand of assets equals supply in equilibrium.

Acceptability or Implication of CAPM

1. The market portfolio is the tangent portfolio.

2. Combining the risk-free asset and the market portfolio gives the portfolio frontier.

3. The risk of an individual asset is characterized by itsco variability with the market portfolio.

4. The part of the risk that is correlated with themarket portfolio,

The systematic risk cannot be diversified away.

• Bearing systematic risk needs to be rewarded.

5. The part of an asset’s risk that is not correlated withthe market portfolio, the non-systematic risk, can bediversified away by holding a frontier portfolio.

• Bearing non-systematic risk need not be rewarded.

Conclusion

Page 22 of 25



According to the calculation of betas and CAPM the

share price of Royal Bank of Scotland is more volatile in

nature than the share price of Tesco. According to methe Tesco is more safe option in the portfolio, instead

of Royal Bank of Scotland; for the investor who don’t

want to take risk and play safe in the market. The

excepted rate of return of Royal Bank of Scotland is

much higher than Tesco. And for those investors who

want to take the risk and earn more profit can opt for

the Royal Bank of Scotland share. But they alwayshave a risk of crashing and losing a huge amount of

investment. If, I have to invest in a share, I will invest

in the share of Royal Bank of Scotland; so that I can

earn more profit. But I also have to keep the eye on the

fluctuation of the market and Royal Bank of Scotland

share price. So, that I can minimise the risk of losing

my investments.

Reference

http://www.investorwords.com/468/beta.html : beta

(accessed on 20 march 2011)

W. F. Sharpe, (September 1964), “Capital Asset Prices: A Theory of Market Equilibrium under Conditions of

Risk,” Journal of Finance 19 pp. 425–442

J. Lintner, (February 1965), “The Valuation of Risk Assets and the Selectionof Risky Investments in Stock Portfolios and Capital Budgets,” Review of Economicsand Statistics 47 pp. 13–37.

Page 23 of 25



Treynor’s article has not been published.

Helbaek, Morten Lindset, Snorre Mclellan, Brock ,

(2010) Corporate Finance; Pages: 164 : McGraw-Hill

Education ; : Berkshire, GBR

Frank J.Fabozzi, Jack Clark Francis, (march.1978); The

Journal of Financial and Quantitative Analysis, Vol.13

no.1; page 101-116

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