Question

Calculate the return for investing for ANZ company both short term and long term and identify the main causes of its volatility in return over the corresponding holding period. The discussion of volatility should consider economic-wide and firm-specific factors.

Answer 1

Rate of return for investment into Australian and New Zealand banking company can be done through Capital Asset pricing model.

Risk free rate in the short-term would be 2% whereas if we are looking at the beta of Australia and New Zealand banking group it is mostly 1.3 and if we are looking at the overall market rate of return during the specified period it would be 8%

Expected rate of return= Risk free rate+beta (Market rate of return- Risk free rate)

=2+1.3(8-2)

= 9.8%

If I am calculating the rate of return in the longer period of time it will be 4% and beta of company will remain similar whereas the market rate of return will be going up to 10% in the long run due to economic recovery.

= 4+1.3(10-4)

= 11.8%

Main causes of volatility in return over the corresponding period is attributed to change in the economic factors like change in the monetary policies and due to which the interest rate and inflation along with the demand in the economy will going to change and it would also mean that the firm specific factors like the overall lending of the bank is going to increase and the bank is also going to earn more of the commission and net interest income and hence there would be a higher expectation of Return In longer period of time.