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Mean Approach & Beta Approach in Stock-Investing

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Mean Approach & Beta Approach in Stock-Investing

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  • September 2, 2010
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This report aims at implement two distinct approaches, which can indicate the expected return and risk of a two-stock portfolio, to generate a practical solution to risk-analyzing for stock-investing. The two approaches are Mean-Variance Approach and CAPM Approach. While we apply the Mean-Variance Approach to determine the expected return and standard deviation, we employ the CAPM approach to measure the beta and expected return of each stock. The calculations of the aforesaid mathematical characteristics will contain the weekly returns during a seven-year time period integrated with the ASX all ordinaries Accumulation Index as a substitute for the market index and Official Cash Rate (thereafter, OCR, which is the interest rate paid by banks in the overnight money market in Australia and New Zealand) as a substitute as rate of return on risk-free asset. In this report, the data of stocks are from David Jones Ltd (DJS) and BHP respectively. DJS is Australia's third-largest department store company operating more than 30 stores across Australia, which also stakes the claim as the world's oldest continuously operating department store (Cengage, 2006). BHP Billiton is the world's largest mining company; it is also the largest company in Australia by Market capitalization, which was created in 2001 by the merger of Australia's Broken Hill Proprietary Company (BHP) and the UK's Billiton ( BHP profile, 2010). 2. MEAN-VARIANCE APPROACH

2.1 Selection of Sample Frequency and Sample Period
To calculate the expected return and the standard deviation of each stock, it is necessary to obtain the relevant and accurate data on share price of historical time series. Evidently, the more the observation points and the longer sample period are employed, the more the reliable assessable consequences can be generated.

Ordinarily, the daily data, weekly data and monthly data of share price can be selected for calculating the expected return and the standard...