Different Perspectives on Risk and Return: Nab & Bhp

1. Introduction

As the core of financial analysis, risk and return are always the key issue in discussion. In this assignment report, we will look into the relationship between risk and return of individual stock as well as portfolios by applying two approaches, the mean-variance approach and the CAPM approach, into practical cases.

Firstly, we carefully collected data from wide-range resources such as school library finance database, the ASX website, various journal articles and reference books. Secondly, we applied the two approaches selecting and calculating the data. Finally, a data analysis was conducted over the result.

2. Background of the company

The two target companies in this report are Billiton Limited (ASX Code: BHP) and National Australia Bank Limited (ASX Code: NAB). Both companies are the top 5 in their own industries and play an important role in the stock market.

National Australia Bank (NAB) is the one of the biggest banks in Australia and also the biggest financial services institution listed on the ASX by market capitalization. It held $654billion total asset and $3841 million cash profit on 2009 financial year. (NAB AnnualReport2009) ‘NAB consists 4.44% of the All Ordinary Index.’ (NAB website).

The other company BHP ‘is the world's largest diversified resources group with a global portfolio of high quality assets. Core activities comprise of production and distribution of minerals, mineral products and petroleum’ (Morningstar DatAnalysis). In the financial year of 2009, BHP has witnessed revenue of 62,121million dollars and covered approximately 10.43% of the All Ordinary Index, which offers it a leading position in the market.

Those two companies are in different industries, facing verified risks and holding financial positions in different ways, therefore, investors can invest in a portfolio combining both of them in order to obtain the maximum benefit and minimize the investment risk. That is what we are going to discuss in the...