Security Analysis and Portfolio Management †MyAssignmenthelp.com

Question: Discuss about the Security Analysis and Portfolio Management. Answer: Introduction Blackmores Limited is an Australian organization that is directed by a vision of inspiring people to embrace national health. Critical to the discussion is the fact that the organization trades publicly implying her historical prices were obtained from yahoo finance using the symbol ASX BLK. Analogously, historical prices for a benchmarking the market standard in Australia was obtained from the same site suing the symbol ASX200. It is notable that the historical prices were collected in order to examine the organizations stock performance, market capitalization, debt and equity mix with an aim of deciding whether investing in the organizations stock would be a wise decision. It is important to note that the study used different techniques and tools for analysis. For instance, Microsoft Excel was used to evaluate the stocks performance using regression analysis. The same toll was used to for overpricing or underpricing of the stock in question by plotting a security market line. Further, the price to earnings ratio was used to check if it is an appropriate time to invest in the stock. In addition, the debt to equity ratio was obtained and used to identify the financial policy implemented by Blackmores Limited. Above all, it is prudent to invest in the companys stocks because the stock price for the organization is underpriced. After collecting the data from the mentioned source, the data was inserted in Microsoft Excel for analysis. It is important to note that monthly lag was chosen before downloading the two sets of datum from yahoo fianc. As a result, the monthly return for every month was calculated using the formula , where the subscript indicates the lag. A scatter plot of BKL against ASX200 was plotted and a trend line was fitted to obtain the regression equation from the data. The results are depicted in figure 1 below. From the graph, it is evident that the stock performed well because the trend line is slopping upwards. Additionally, the for the stock is 0.3963, which implies that the stocks volatility was 61 percent less than the markets volatility in the last five years. It is notable that that for the organization in question was less than one implying much of the price fluctuations were brought about by unsystematic risk. Simply put, the price fluctuations of the stock were a direct result of investment decisions made by the management of Blackmores Limited. The scatter plot in figure 2 below further highlights that the mentioned idea because the stock was performing better than the ASX 200 had performed up to the first quarter of the fourth year. As Waemustafa, and Sukri, (2016) argue, organizations that plot above the market standard are said to be performing well. Ang (2015) argues that the total stockholders equity and the price of one share are the only requirements for calculating the market capitalization. In a different publication, Bali, Engle, R and Murray (2016) argue that the market capitalization could be calculated using the following formula. . Consequently, the total stockholders equity was obtained from Blackmores financial report for the year ending December 31st 2016 (Blackmores, 2016). The total stockholders equity was obtained as 173,643.00. The price of one share was collected from the closing price of the stock on December 31 2016, which was 102.50. Therefore, the market capitalization for Blackmores limited as of December 31 2016 was $ 17,798,407.50. The Capital Asset Pricing Model was used to identify whether Blackmores stocks are overpriced or underpriced. Critical to the discussion is the fact that several variables were calculated prior to determining whether the stocks are overpriced or underpriced. Specifically, the expected return from the stock, the risk free rate, the beta of the stock, and the return of the market were calculated. For instance, Musharbash, and Linnertova (2016) argue that the expected return is calculated using the formula: . Consequently, the expected return for Blackmores stock was calculated by taking the closing price of the stock minus the opening price of the stock. The result was then divided by the opening price and multiplied by one hundred. The expected market return was calculated using a similar procedure: only that the historical opening and closing prices for ASX200 were used. The result from the calculation was established as 39.06%. Mungikar and Muralidhar, K.S. (2014) argue that the risk free rate of return should be calculated using: . Where is the risk free rate, is the expected return of the stock, b is the beta of the stock, and is the expected return of the market. The formula was then used to calculate the risk free rate of return using values of beta, expected return of the stock and market that were obtained above. The risk free market return was found to be 7.03%. A security market line was then plotted by assuming that the expected return is 7.03% when eta is zero and 39.06% when beta is 1%. The security market line is depicted in figure 3 below. According to Damodaran (2012), a stock is said to be overpriced if the beta is above the security market line and underpriced if the stocks beta is below the security market line. The beta for the stock in question is -0.0163, which is below the security market line. Therefore, the analysis reveals that the stock is underpriced. A time series analysis is required in order to forecast the future price of the stock. This could be done using an appropriate statistical software such as R. The data will be uploaded in R and checked for the seasonal effect using the command . The trend will also be checked using the command (Hyndman, and Athanasopoulos, 2014). The cyclic and trend component will then be removed by taking the natural logarithm of the returns and using it for the proceeding analysis. From the scatter plot in figure 2 above it is evident that the data is non-stationary because the mean and variance is not constant over time (Carmona, 2014). Therefore, the data will be differenced the appropriate number of times to obtain an ARIMA model of the form ARIMA(p,d,q). Using the forecast library, it will be possible to make the prediction using the command where BLK is the differenced data set and h is the number of months forecasted (Cao, Li, and Wang, 2016). From the scatter plot in figure 2 above, it is evident that the trend for the stock is rapidly declining. Further, Damodaran (2012) reveals that the price to earnings ratio could be used to identify an appropriate time for investing in a stock. Specifically, the author argues that stocks from organizations with price to earnings ratios that are below 10 should be purchased while those that are above 20 should not be purchased. The price to earnings ratio for the organization is present on yahoo finance and is 23.58 implying it is an inappropriate time to invest in the stock. Babu (2012) reveals that the debt to equity ratio is an important ratio that could be used to identify the debt to equity financing. The same notion is shared by Damodaran (2012) who also mentions that the ratio could be calculated using the formula. The formula was used to calculate the debt to equity ratio, which was established to be 0.41657903. According to Gupta (2016), the ratio indicates that investors finance most of the assets and activities in the organization. Specifically, the ratio implies that at least 66.6 percent of the organizations financing is from investors. It is important to note that the organization uses different types of debt and equity. For instance, the organization uses equity such as retained earnings, common stock, and treasury stocks. Additionally, the company uses debt financing such as debentures and loans. Apparently, the organization uses both debt and equity to finance her activities. Critical to the discussion is the fact that the organization embraces a long-term financing policy because of the debt to equity ratio, the type of debts, and equity present in the companys books of accounts. According to Anuar, and Chin (2016), an organization is said to be embracing a long-term financial policy if it uses debentures, retained earnings, loans from financial institutions, and common stocks. As mentioned earlier, the organization uses the mentioned sources of debt and equity, which implies that Blackmores Limited is embracing a long-term financing policy. Critical to the discussion is the fact that close to thirty percent of Blackmores Limited activities are financed by debt implying the organization is free from risks such as bankruptcy, and loss of future financing ability. The long-term financing policy embraced by the organization in question implies that the organization has advantages as well as disadvantages. According to Nwude, Itiri, Agbadua, and Udeh (2016), the financial policy used by the organization increases the tax for Blackmores Limited because maximizing on debt reduces that tax paid by an organization (Blackmores Limited uses limited debt). In a different study, Modugu (2013) reveals that the organization enjoys the flexibility of borrowing in future for minimizing on debt financing. Analogously, Mwangi, Makau, and Kosimbei (2014) reveal that the policy frees the organization from agency costs. Regardless, the same financial policy is associated with negative effects such as a careless management. As evidenced, Nwude, et al., (2016) reveal that debt financing is responsible for keeping the management on its toes because a careless management could lead to bankruptcy. Apparently, Blackmores limited is a healthy organization implying it is prudent to invest in the organizations stocks given a capital of $10,000. To begin with, the organization is financially healthy because it has a very low debt to equity ratio. Simply put, the organization is nowhere near solvency, which implies the organization will continue to exist in the long-term. Additionally, the financing policy implemented by the organization implies that it could still borrow from lenders if the market underperforms. Critical to the discussion is the fact that such an investment should be made with a long-term perception in mind because the scatter plot in figure 2 above indicates that the prices for the stock are declining. This owes to the fact that the price for the stock could continue to decline in the near future, but will eventually rise in the long-term. Why should the stock price for the organization under discussion rise in the long-term? Evidence from the security market line in figure 3 above indicates that the stock price is underpriced. According to Acqua, Etro, Teti, and Murri (2014), underpriced stocks are known to increase in price when the market realizes that the stock is underpriced. Critical to the discussion is the fact that the price should rise until its saturation when the stock will be overpriced. Therefore, it is prudent to buy stocks for the organization in question despite the indicator of the price to earnings ratio. Conclusion In conclusion, this paper evaluates the historical prices for Blackmores Limited and recommends that it is prudent invest in the organizations stock. Vital to the debate is the truth that a regression analysis was used to examine the stocks historical performance, which indicates that the tock performed well in the past. Regardless, the price for the stock has been declining recently but the trend is expected to change. This owes to the truth that the organizations management is risk averse and has used a financing strategy that ascertains Blackmores limited remains a healthy organization financially. Additionally, the share value for the stock in question is underpriced, which implies that the price is likely to rise in future. Therefore, it is advisable to invest in Blackmores limited stocks. References Acqua, D. A., Etro, L. L., Teti. E., and Murri, M. (2014). IPO Underpricing and Aftermarket Performance in Italy. International Journal of Finance and Banking, 1(5): 30-45. Ang, C. S. (2015).Analyzing financial data and implementing financial models using R. Cham: Springer, 2015 Anuar, H., and Chin, O. (2016). 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