1

Table of Figures
Figure 1: Monthly Closing Prices of J Sainsbury PLC ............................................................................... 2
Figure 2: Monthly Rates of Return of J Sainsbury PLC ............................................................................ 2
Figure 3: Monthly Closing Prices of BAT PLC .......................................................................................... 3
Figure 4: Monthly Rates of Return of BAT PLC ....................................................................................... 3
Figure 5: Monthly Closing Prices of GSK PLC .......................................................................................... 3
Figure 6: Monthly Rates of Return of GSK PLC ....................................................................................... 4
Figure 7: Average Monthly Returns and Standard Deviation of Monthly Returns (Sains., BAT, GSK) ... 4
Figure 8: UK Food Retail Market Players (2010) ..................................................................................... 4
Figure 9: Global food retail industry segmentation 2009e ..................................................................... 5
Figure 10: Sainsbury's Property Management 2010............................................................................... 5
Figure 11: Sainsbury's supermarket space growth from 2009 ............................................................... 6
Figure 13: Illicit cigarette market (2009)................................................................................................. 6
Figure 14: Forecast for numbers of smokers 2000-2050 ........................................................................ 7
Figure 15: R&D Cost in the Industry........................................................................................................ 8
Figure 16: Clinical Trials .......................................................................................................................... 8
Figure 17: R&D of BAT............................................................................................................................. 8
Figure 18: Monthly Rates of Return of Gold ........................................................................................... 8
Figure19: Average Monthly Stock Returns and Standard Deviation of Monthly Returns of Gold ......... 9
Figure 20: Calculation for Beta of Gold ................................................................................................... 9
Figure 21: Gold as Hedge and Safe Haven ............................................................................................ 10
Figure 22: Evolution of the Correlation of Gold and Global Stock Index .............................................. 11
Figure 23: Portfolio (Sainsbury-BAT)..................................................................................................... 11
Figure 24: Portfolio (Sainsbury-GSK)..................................................................................................... 12
Figure 25: Portfolio (Sainsbury-Gold) ................................................................................................... 12
Figure 26: Portfolio (BAT-GSK) .............................................................................................................. 12
Figure 27: Portfolio (BAT-Gold) ............................................................................................................. 13
Figure 28: Portfolio (GSK-Gold) ............................................................................................................. 13
Figure 29: Risk-Return Graph (Sainsbury-BAT) ..................................................................................... 14
Figure 30: Risk-Return Graph (Sainsbury-GSK) ..................................................................................... 14
Figure 31: Risk-Return Graph (Sainsbury-Gold) .................................................................................... 15
Figure 32: Risk-Return Graph (BAT-GSK) .............................................................................................. 15
Figure 33: Risk-Return Graph (BAT-Gold) ............................................................................................. 16
Figure 34: Risk-Return Graph (GSK-Gold) ............................................................................................. 16
Figure 35: Portfolio Return and Risk Overview ..................................................................................... 17
Figure 36: Price Performance Comparison of FTSE100, BAT, GSK and Sainsbury 2004-2011 .............. 17
Figure 37: Gold vs. FTSE100 2005-2011 ................................................................................................ 18

Introduction
This report deals with the analysis of different financial assets, in order to be able to prepare
an investment proposal for the investor with certain preferences. Significant factors affecting
return and risk of these assets should be identified and analysed by using fundamental and
statistical methods, in order to prepare investment decisions and develop strategies for the
future.
Risky securities
(a) Monthly closing prices were retrieved from FAME database:
Figure 1: Monthly Closing Prices of J Sainsbury PLC

January
February
March
April
May
June
July
August
September
October
November
December

2011
3.82
3.80
3.35
3.48
3.46
3.29
3.04

2010
3.24
3.30
3.28
3.38
3.24
3.22
3.44
3.65
3.91
3.89
3.56
3.76

J Sainsbury PLC
2009 2008 2007
3.33 3.96 4.34
3.15 3.55 5.11
3.13 3.43 5.50
3.31 3.84 5.73
3.10 3.49 5.58
3.13 3.18 5.85
3.18 3.16 5.74
3.26 3.48 5.54
3.25 3.48 5.78
3.30 2.83 5.47
3.22 2.87 4.40
3.24 3.29 4.25

2006
3.01
3.20
3.33
3.34
3.19
3.35
3.52
3.57
3.76
3.92
3.99
4.09

2005
2.83
2.86
2.89
2.82
2.86
2.85
2.80
2.83
2.80
2.79
2.85
3.15

2004
3.19
3.42
2.98
3.18
3.11
3.25
2.70
2.60
2.55
2.58
2.61
2.71

Figure 2: Monthly Rates of Return of J Sainsbury PLC

January
February
March
April
May
June
July
August
September
October
November
December

2011
0.014
-0.004
-0.118
0.039
-0.008
-0.047
-0.077

2010
0.001
0.020
-0.008
0.033
-0.042
-0.008
0.069
0.063
0.070
-0.004
-0.086
0.058

J Sainsbury PLC
2009
2008
2007
0.014 -0.069 0.060
-0.053 -0.103 0.179
-0.007 -0.034 0.075
0.056 0.118 0.043
-0.061 -0.091 -0.026
0.009 -0.087 0.047
0.014 -0.009 -0.019
0.026 0.102 -0.034
-0.002 0.001 0.042
0.015 -0.188 -0.053
-0.024 0.016 -0.196
0.005 0.145 -0.034

2006
-0.045
0.064
0.038
0.005
-0.046
0.049
0.052
0.013
0.053
0.043
0.019
0.026

2005
0.046
0.009
0.013
-0.026
0.014
-0.002
-0.020
0.013
-0.013
-0.002
0.020
0.108

2004

-0.021
0.012
0.014
0.035

3
Figure 3: Monthly Closing Prices of BAT PLC

January
February
March
April
May
June
July
August
September
October
November
December

2011
23.05
24.62
25.02
26.11
27.22
27.31
28.21

British American Tobacco PLC

2010 2009 2008 2007
20.71 19.00 17.95 15.44
22.30 17.97 18.95 15.49
22.72 16.13 18.91 15.89
20.54 16.39 18.97 15.51
20.42 16.88 18.88 17.11
21.37 16.73 17.39 16.98
21.94 18.58 18.28 16.00
22.16 18.74 18.61 16.45
23.75 19.63 18.35 17.52
23.80 19.43 17.00 18.30
23.31 18.47 16.98 18.87
24.64 20.17 18.00 19.65

2006
12.67
13.59
13.94
14.02
13.38
13.62
14.43
14.40
14.44
14.29
14.39
14.29

2005
9.20
9.55
9.33
9.78
10.44
10.76
11.37
11.16
11.91
12.43
12.60
13.00

2004
7.65
8.22
8.19
8.55
8.00
8.55
8.36
8.38
8.01
8.20
8.79
8.98

Figure 4: Monthly Rates of Return of BAT PLC

January
February
March
April
May
June
July
August
September
October
November
December

2011
-0.064
0.068
0.016
0.044
0.043
0.003
0.033

British American Tobacco PLC

2010
2009
2008
2007
0.027 0.056 -0.087 0.080
0.077 -0.054 0.056 0.003
0.019 -0.102 -0.002 0.026
-0.096 0.016 0.003 -0.024
-0.006 0.030 -0.005 0.103
0.046 -0.009 -0.079 -0.008
0.027 0.111 0.051 -0.058
0.010 0.009 0.018 0.028
0.072 0.047 -0.014 0.065
0.002 -0.010 -0.074 0.045
-0.021 -0.049 -0.001 0.031
0.057 0.092 0.060 0.041

2006
-0.025
0.073
0.026
0.006
-0.046
0.018
0.059
-0.002
0.003
-0.010
0.007
-0.007

2005
0.025
0.038
-0.023
0.048
0.067
0.031
0.057
-0.018
0.067
0.044
0.014
0.032

2004

-0.044
0.024
0.072
0.021

Figure 5: Monthly Closing Prices of GSK PLC

January
February
March
April
May
June
July
August
September
October
November
December

2011
11.29
11.81
11.90
13.06
13.20
13.34
13.64

2010
12.17
12.14
12.66
12.11
11.57
11.43
11.11
12.21
12.55
12.21
12.12
12.40

Glaxosmithkline PLC
2009 2008 2007
12.20 11.82 13.65
10.69 11.02 14.30
10.88 10.66 13.97
10.49 11.21 14.49
10.42 11.14 13.10
10.69 11.13 13.05
11.49 11.76 12.55
12.03 12.97 12.95
12.30 12.11 12.97
12.50 11.97 12.38
12.57 11.20 12.88
13.20 12.85 12.79

2006
14.38
14.46
15.05
15.56
14.80
15.11
14.81
14.88
14.22
14.00
13.51
13.44

2005
11.75
12.43
12.13
13.12
13.60
13.51
13.41
13.39
14.42
14.69
14.29
14.69

2004
11.80
11.21
10.68
11.67
11.40
11.16
11.17
11.31
11.91
11.47
11.01
12.22

4
Figure 6: Monthly Rates of Return of GSK PLC

January
February
March
April
May
June
July
August
September
October
November
December

2011
-0.090
0.047
0.007
0.098
0.011
0.011
0.022

2010
-0.078
-0.002
0.042
-0.043
-0.045
-0.012
-0.028
0.099
0.027
-0.027
-0.007
0.023

Glaxosmithkline PLC
2009
2008
2007
-0.051 -0.076 0.016
-0.123 -0.068 0.048
0.017 -0.033 -0.023
-0.035 0.052 0.037
-0.007 -0.007 -0.096
0.025 0.000 -0.004
0.075 0.057 -0.038
0.047 0.102 0.032
0.022 -0.066 0.002
0.017 -0.012 -0.045
0.006 -0.064 0.040
0.050 0.147 -0.007

2006
-0.021
0.006
0.041
0.034
-0.049
0.021
-0.020
0.005
-0.044
-0.015
-0.035
-0.005

2005
-0.038
0.058
-0.024
0.082
0.037
-0.007
-0.007
-0.001
0.077
0.019
-0.027
0.028

2004

0.053
-0.037
-0.040
0.110

(b)
Figure 7: Average Monthly Returns and Standard Deviation of Monthly Returns (Sains., BAT, GSK)

Sainsbury BAT GSK

0.004
0.016 0.003
Average Monthly Stock Returns
0.061
0.045 0.049
Standard Deviation of Monthly Returns
(c)
J Sainsbury PLC (Sainsbury)
J Sainsbury PLC was founded in 1869. Today this company runs a total of 934 stores (557
supermarkets and 377 convenience stores). It mutually possesses Sainsburys Bank with
Lloyds Banking Group and has two property joint ventures.1 The relative positioning of
Sainsburys market share with respect to other leading players in the market can be seen in
the Figure 8:
Figure 8: UK Food Retail Market Players (2010)

Source: http://www.ivoryresearch.com/

Available at: http://www.j-sainsbury.co.uk/about-us/business-structure/

5
According to the Figure 8, Sainsburys is the third biggest food retailer in the UK with the
market share of 16,3% after ASDA 16,6% and Tesco 30,6%.
Sainsburys is not present in markets other than UK. This fact shows the lack of
geographical diversification in Sainsburys business. Tesco is a contrasting example in this
industry in terms of geographical diversification, this company is present in the UK, but also
in the USA, Asia and another European countries.2 Consequently, Sainsburys might get in
trouble if there are relevant problems within food retailing in the UK and alternative markets
will be still performing well. Concentration on the single market (UK) can lead to potentially
lost growth opportunities in other markets, like Asia or USA, which have a significant share
of the global food retail industry (Figure 9). Therefore, the lack of regional diversification of
Sainsburys might be considered as one of the major risks for this security.
Figure 9: Global food retail industry segmentation 2009e

Source: http://www.courtneywarnimont.com/

Sainsburys alternative business represents an opportunity for the future growth. Its
investments in the property might lead to the future growth of this company.
Figure 10: Sainsbury's Property Management 2010

Source: Sainsburys Annual Report 2010

Figure 10 shows the current performance of the active property management, which leads to
profits of 108 million in 2010.

Tesco Annual Report (2011)

6
Figure 11: Sainsbury's supermarket space growth from 2009

Source: Sainsburys Annual Report 2010

Sainsburys is investing money in order to increase the current supermarket space (Figure
11). The growth of market space might lead to the cost savings and to the increased
revenues. All in all, investments in property can be considered as one of the major upside
potentials for this share, due to the lack of other growth plans, like international expansion.
British American Tobacco PLC (BAT)
BAT is the worlds second largest quoted tobacco group by global market share with brands
sold in more than 180 markets.3 This company has leadership in more than 50 markets.
Nevertheless there are still risks and upside potentials which can influence on the share
price in the next 5-7 years.
Illicit trade in the form of counterfeit products smuggled genuine products and locally
manufactured products on which applicable taxes are evaded, is considered to be a
significant and growing threat to the company.4 Increasing excise rates might encourage
consumers to switch to illegal cheaper products and provide greater rewards for smugglers.5
The risk is intensified where existing economic situation have resulted in high unemployment
rates and reduced disposable incomes of consumers.6 Figure 13 illustrates the scope of the
illicit cigarette market in 2009, which can be defined as a significant part of the whole global
tobacco market.
Figure 12: Illicit cigarette market (2009)

Source: http://www.tobaccofreecenter.org/

Potential impacts of this risk can be erosion of brand equity, reduced ability to take price
increases, investment in trade marketing and distribution might me destabilized. Accordingly,

Available at: http://www.bat.com

Available at : http://www.guardian.co.uk/business/2007/apr/27/smoking
5
Available at : http://www.ft.com/cms/s/0/2f48a4f0-ffd9-11e0-89ce-144feabdc0.html#axzz1e9qUchXj
6
BAT - Annual Report (2010)
4

7
these impacts can lead to lower sales volumes and reduced profits.7 To sum up, illicit trade
might be seen as a potential major risk for the BAT and consequently this risk can negatively
influence on the stock performance.
One of the major upside potentials for this stock might be derived from the future world
tobacco consumption. Trends show that individual smokers will consume fewer cigarettes
each and smaller percentages of populations will smoke. However, with the worlds
population predicted to grow to seven billion by the end of 2012 and nine billion by the end
of 20508, it is believed that tobacco industry will be a very sustainable and growing for a
horizon of 5-7 years.
Figure 13: Forecast for numbers of smokers 2000-2050

Source: http://www.who.int/tobacco/

Figure 14 provides two different scenarios of the future number of smokers. Both scenarios
can be positively evaluated for the BAT, as rising numbers of smokers might lead to rising
revenues and profits.9 Consequently the stock performance can benefit from above
mentioned scenarios and therefore it can be seen as an upside potential.
GlaxoSmithKline PLC (GSK)
GSK, a global healthcare group, participates in the creation and discovery, development,
manufacturing, and marketing of pharmaceutical products, including vaccines, over-thecounter (OTC) medicines, and health-related consumer products.10
It can be said that companies in this industry are facing to significant amounts of risks.
Possibility that R&D will not deliver commercially successful new products is the key risk
factor or this security. Figure 15 shows that companies in this industry invest significant
amount of money in R&D in order to have a wide range of products, which are patented, and
to be able to generate revenues in the future. Other competitors are able to produce similar
products after the expiration of patents. Consequently sales of these products are
considered to decline rapidly.11 Additionally, developing new products is an uncertain
process (Figure 16). A new product candidate might fail at any stage of the development
process, and one or more late stage product candidates could fail to receive regulatory
approval.12
7

BAT - Annual Report (2010)

BAT - Annual Report (2010)
9
Available at: http://www.who.int/tobacco/statistics/tobacco_atlas/en/
10
Available at: http://investing.businessweek.com/research/stocks/snapshot/snapshot_article.asp? GSK:LN
11
GSK - Annual Report (2010)
12
GSK - Annual Report (2010)
8

Figure 14: R&D Cost in the Industry

Figure 15: Clinical Trials

Figure 16: R&D of BAT

Source: http://www.cbo.gov/

Source: http://www.cbo.gov/

Source: GSK Annual Report (2010)

New products in der pipeline might be considered as upside potential for GSK share. This
fact can be specified by division of GSK developments portfolio in early and late stage till its
market maturity (Figure 17). Late stage developments can influence significantly on
companys revenues in the short term of 1-3 years. Due to the known investment horizon of
5-7 years, products in late stages of developing might turn to profitable assets in companys
future portfolio (Figure 17). Returns in R&D play a significant role in this industry. From the
assumption that GSK will be successful in new product launching, one can derive a positive
performance of the returns and share in the future.
Hedging with Gold
a) Monthly rates of return of gold were given in the guideline:
Figure 17: Monthly Rates of Return of Gold

January
February
March
April
May
June
July
August
September
October
November
December

2011
-0.025
0.012

2010
-0.015
-0.020

2009
0.052
0.098

Gold
2008
0.108
0.037

2007
0.002
0.053

2006
0.078
0.009

2005
-0.041
-0.002

0.037
0.035
0.025
0.012
0.029

0.016
0.032
0.049
0.023
-0.032
0.019
0.045
0.056
0.021
0.015

-0.020
-0.037
0.043
0.018
-0.012
0.016
0.050
0.047
0.080
0.007

0.050
-0.061
-0.023
0.001
0.057
-0.107
-0.011
-0.028
-0.057
0.073

-0.015
0.037
-0.018
-0.017
0.015
0.000
0.071
0.059
0.068
-0.004

0.004
0.096
0.106
-0.117
0.063
-0.002
-0.054
-0.021
0.072
0.003

0.026
-0.012
-0.017
0.021
-0.014
0.032
0.041
0.030
0.014
0.070

2004

0.012
0.037
0.045
0.006

9
Figure18: Average Monthly Stock Returns and Standard Deviation of Monthly Returns of Gold

Average Monthly Rate of Returns

0.017

Standard Deviation

0.043

b) Calculation the beta for gold by using a regression technique in EXCEL:

Figure 19: Calculation for Beta of Gold

SUMMARY OUTPUT
Regression Statistics
Multiple R
0.050
R Square
0.003
Adjusted R Square
-0.010
Standard Error
0.043
Observations
83.000
ANOVA
df
Regression
Residual
Total

Intercept
X Variable 1

SS
1
81
82

MS
0.000 0.000
0.150 0.002
0.150

F
Significance F
0.205
0.652

Coefficients Standard Error t Stat P-value

0.017
0.005 3.660
0.000
0.051
0.112 0.452
0.652

Lower 95% Upper 95% Lower 95.0% Upper 95.0%

0.008
0.027
0.008
0.027
-0.173
0.275
-0.173
0.275

c)
By comparing the results of standard deviation and average monthly returns for the
securities (Sainsburys, GSK, BAT) and for gold between 2004 and 2011, it can be said that
gold is the less riskiest investment with the standard deviation of 0,043. Due to the
calculations gold has the highest average monthly return of 0,017. Consequently, the
performance (risk-adjusted-return) of gold might be seen as the best one among these
investment alternatives.
Beta can be defined as a measure of the volatility or of a systematic risk of a security or a
portfolio in comparison to the market as a whole.13 In this case beta measures the volatility
of gold in comparison to FTSE100. The beta for gold amounts approximately to 0,051.
Consequently, gold can be seen as an asset, which was almost not correlated on average
between 2004 and 2011 with the FTSE100 at all.
Gold should be considered as a hedge instrument in equity investments portfolios, because
of its relatively very low correlation with the FTSE100. The evidence of the golds ability to be
a hedge instrument for the UKs stock market can be although derived from the Figure 21.

13

Available at: http://www.investopedia.com/terms/b/beta.asp#ixzz1eXxmsTnm

10
Figure 20: Gold as Hedge and Safe Haven

Source: Is gold a safe haven? International evidence, D.G. Baur, T.K. McDermott, Journal of Banking & Finance 34, (2010)

Nevertheless the correlation of gold with the market indexes is not constant, what can be
seen in the Figure 22. The correlation between gold and the global stock index was
changing during the time.14 The Figure 22 shows that gold is not a hedge at all times but
only in certain periods. In certain periods gold investments can even stabilize and/or improve
the performance of the equity portfolio because gold is also known as a safe haven for the
investors.15

14
15

D.G. Baur, T.K. McDermott (2010)

D.G. Baur, T.K. McDermott (2010)

11
Figure 21: Evolution of the Correlation of Gold and Global Stock Index

Source: Is gold a safe haven? International evidence, D.G. Baur, T.K. McDermott, Journal of Banking & Finance 34, (2010)

Investors should consider gold in their portfolios as a hedge instrument, which lowers the
systematic risk of a portfolio. The proportion of gold in the portfolio depends on the investors
risk appetite.

Minimum-variance portfolios
a) Identifying minimum minimum-variance portfolio:
Figure 22: Portfolio (Sainsbury-BAT)

Weight
Portfolio
1
2
3
4
5
6
7
8
9
10
11

Sainsbury
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1

BAT
1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0

Weighted
average rate of
return
0.016
0.015
0.013
0.012
0.011
0.010
0.009
0.007
0.006
0.005
0.004

Standard
deviation of
returns
0.045
0.042
0.041
0.0399
0.0403
0.042
0.044
0.048
0.051
0.056
0.061

Tick the portfolio

with the lowest
risk

Covariance
0.0006
Correlation
0.237

12
Figure 23: Portfolio (Sainsbury-GSK)

Weight
Portfolio
1
2
3
4
5
6
7
8
9
10
11

Sainsbury
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1

GSK
1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0

Weighted
average rate of
return
0.003
0.003
0.004
0.004
0.004
0.004
0.004
0.004
0.004
0.004
0.004

Standard
deviation of
returns
0.049
0.047
0.045
0.0436
0.0435
0.0444
0.046
0.049
0.052
0.056
0.061

Tick the portfolio

with the lowest
risk

Weighted
average rate of
return
0.017
0.016
0.015
0.013
0.012
0.011
0.009
0.008
0.007
0.005
0.004

Standard
deviation of
returns
0.043
0.037
0.034
0.0314
0.0313
0.033
0.037
0.042
0.047
0.054
0.061

Tick the portfolio

with the lowest
risk

Covariance
0.0009
Correlation
0.296

!!!!!!!!

Figure 24: Portfolio (Sainsbury-Gold)

Weight
Portfolio
1
2
3
4
5
6
7
8
9
10
11

Sainsbury
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1

Gold
1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0

Covariance
-0.0005
Correlation
-0.213

!!!!!!!

Figure 25: Portfolio (BAT-GSK)

Weight
Portfolio
1
2
3
4
5
6
7
8
9
10
11

BAT
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1

GSK
1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0

Weighted average
rate of return
0.003
0.005
0.006
0.007
0.008
0.010
0.011
0.012
0.013
0.015
0.016

Standard deviation
of returns
0.049
0.046
0.043
0.041
0.039
0.0381
0.0379
0.039
0.040
0.042
0.045

Tick the portfolio

with the lowest
risk

!!!!!!!!

Covariance
0.0007
Correlation
0.301

13

Figure 26: Portfolio (BAT-Gold)

Weight
Portfolio
1
2
3
4
5
6
7
8
9
10
11

BAT
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1

Gold
1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0

Weighted average
rate of return
0.017
0.017
0.017
0.017
0.017
0.017
0.016
0.016
0.016
0.016
0.016

Standard deviation
of returns
0.043
0.038
0.035
0.032
0.030
0.0298
0.0309
0.033
0.036
0.040
0.045

Tick the portfolio

with the lowest
risk

Covariance
-0.0001
Correlation
-0.0694

!!!!!!!

Figure 27: Portfolio (GSK-Gold)

Weight
Portfolio
1
2
3
4
5
6
7
8
9
10
11

GSK
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1

Gold
1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0

Weighted average
rate of return
0.017
0.016
0.015
0.013
0.012
0.010
0.009
0.008
0.006
0.005
0.003

Standard deviation
of returns
0.043
0.038
0.035
0.032
0.0310
0.0313
0.033
0.036
0.040
0.044
0.049

Tick the portfolio

with the lowest
risk

!!!!!!

Covariance
-0.0002
Correlation
-0.0805

14

b)
i) Plotting of risk-return graphs
Figure 28: Risk-Return Graph (Sainsbury-BAT)

Risk-return graph Sainsbury/BAT

0.018

Weighted average rate of return

0.016

0.045, 0.016
0.042, 0.015
0.041, 0.013
0.0399, 0.012
0.0403, 0.011
0.042, 0.010
0.044, 0.009
0.048, 0.007
0.051, 0.006
0.056, 0.005
0.061, 0.004

0.014
0.012
0.010
0.008
0.006
0.004

Portfolio

0.002
0.000
0.000

0.010

0.020

0.030

0.040

0.050

0.060

0.070

Standard deviation of returns

Figure 29: Risk-Return Graph (Sainsbury-GSK)

Risk-return graph Sainsbury/GSK

0.004
0.061, 0.004

Weighted average rate of return

0.004

0.056, 0.004
0.052, 0.004

0.004

0.049, 0.004
0.004

0.046, 0.004
0.0444, 0.004

0.004

Portfolio

0.0435, 0.004
0.0436, 0.004

0.004

0.045, 0.004
0.004

0.047, 0.003
0.049, 0.003

0.003
0.000

0.010

0.020

0.030

0.040

Standard deviation of returns

0.050

0.060

0.070

15
Figure 30: Risk-Return Graph (Sainsbury-Gold)

Risk-return graph Sainsbury/Gold

0.020

Weighted average rate of return

0.018

0.043, 0.017
0.037, 0.016
0.034, 0.015
0.0314, 0.013
0.0313, 0.012
0.033, 0.011
0.037, 0.009
0.042, 0.008
0.047, 0.007
0.054, 0.005
0.061, 0.004

0.016
0.014
0.012
0.010
0.008
0.006
0.004

Portfolio

0.002
0.000
0.000

0.010

0.020

0.030

0.040

0.050

0.060

0.070

Standard deviation of returns

Figure 31: Risk-Return Graph (BAT-GSK)

Risk-return graph BAT/GSK

0.018

Weighted average rate of return

0.016

0.045, 0.016
0.042, 0.015
0.040, 0.013
0.039, 0.012
0.0379, 0.011
0.0381, 0.010
0.039, 0.008
0.041, 0.007
0.043, 0.006
0.046, 0.005
0.049, 0.003

0.014
0.012
0.010
0.008
0.006
0.004

Portfolio

0.002
0.000
0.000

0.010

0.020

0.030
Standard deviation of returns

0.040

0.050

0.060

16
Figure 32: Risk-Return Graph (BAT-Gold)

Risk-return graph BAT/Gold

0.018
0.043, 0.017

0.017
Weighted average rate of return

0.038, 0.017
0.017

0.035, 0.017

0.017

0.032, 0.017

0.017

0.030, 0.017
0.0298, 0.017

0.017

0.0309, 0.016

0.016

Portfolio

0.033, 0.016

0.016

0.036, 0.016

0.016

0.040, 0.016

0.016
0.016
0.000

0.045, 0.016
0.005

0.010

0.015

0.020

0.025

0.030

0.035

0.040

0.045

0.050

Standard deviation of returns

Figure 33: Risk-Return Graph (GSK-Gold)

Risk-return graph GSK/Gold

0.020

Weighted average rate of return

0.018

0.043, 0.017
0.038, 0.016
0.035, 0.015
0.032, 0.013
0.0310, 0.012
0.0313, 0.010
0.033, 0.009
0.036, 0.008
0.040, 0.006
0.044, 0.005
0.049, 0.003

0.016
0.014
0.012
0.010
0.008
0.006
0.004

Portfolio

0.002
0.000
0.000

0.010

0.020

0.030
Standard deviation of returns

0.040

0.050

0.060

17
ii)
Figure 34: Portfolio Return and Risk Overview

Sainsbury BAT
Sainsbury Return
0.004 0.012
Stdev
0.061 0.040
BAT
Return
0.016
Stdev
0.045
GSK
Return
Stdev
Gold
Return
Stdev

GSK
0.004
0.044
0.011
0.038
0.003
0.049

Gold
0.012
0.034
0.017
0.030
0.010
0.038
0.017
0.043

iii)
Figure 35 shows us returns and standard deviations of different portfolios. These portfolios
consist of one or two assets. It can be seen that portfolio with proportions of BAT (50%) and
Gold (50%) offers the lowest standard deviation (risk) of 0.030 and weighted average
monthly rate of return of 0.017. Both assets in this investment portfolio have a higher risk
(BAT 0.040, gold 0.043), but due to the combination of both assets with correlation
coefficient of -0.0694, investors are able to diversify its portfolio and consequently minimise
risk.
b)
According to the investors preferences in terms of lowest risk (minimum-variance) and
investment horizon of 5-7 years, portfolio, BAT (50%) and Gold (50%), might be considered
as the best investment among portfolios, which were analysed in this report. This portfolio
has a standard deviation (risk) of 0.030 and weighted average monthly rate of return of
0.017.
Figure 35: Price Performance Comparison of FTSE100, BAT, GSK and Sainsbury 2004-2011

Source: http://uk.finance.yahoo.com/

Figure 36 shows us the comparison of stocks performance (BAT, Sainsbury and GSK) and
the performance of FTSE100 from 2004 to 2011. BATs share delivered a significant better

18
performance in the past then other shares or the whole index. This fact might be also
considered as a further argument for the election of the above mentioned portfolio.

Figure 36: Gold vs. FTSE100 2005-2011

Gold
FTSE 100

Source: http://www.comdirect.de/

Additionally Figure 37 shows us the significant outperformance of gold in comparison to the

FTSE100 from 2005 to 2011.
Due to the above made analysis, this combination might outperform the whole stock market,
referring to the performance of these both assets in the past. The idea of hedging with gold
is also considered in this investment, because of the proportions (50%/50%) in this portfolio.
This portfolio consists of two different assets (BAT, Gold), consequently it might be
supposed as not well-diversified portfolio in comparison to the FTSE100. This portfolio can
possess a relative high unsystematic risk, which theoretically could be diversified by adding
additional assets to the portfolio. In order to conclude, the investor should invest in the
portfolio, BAT (50%) and Gold (50%), considering his portfolio restrictions (minimumvariance, horizon).

19

List of references
BATs Annual Report (2010): http://www.bat.com/ar/2010/ (retrieved: 10.11.2011)
BATs Business Structure: http://www.bat.com (retrieved: 10.11.2011)
D.G. Baur, T.K. McDermott: Is gold a safe haven? International evidence, Journal of Banking
& Finance 34 (2010)
Definition of Beta: http://www.investopedia.com/terms/b/beta.asp#ixzz1eXxmsTnm
(retrieved: 08.11.2011)
1. GSKs Annual Report (2010): www.gsk.com/investors/reps10/GSK-Annual-Report2010.pdf (retrieved: 10.11.2011)
GSKs Business Description:
http://investing.businessweek.com/research/stocks/snapshot/snapshot_article.asp? GSK:LN
(retrieved: 05.11.2011)
Joossens, Luk et al. (2009): How Eliminating the Global Illicit Cigarette Trade Would
Increase Tax Revenue and Save Lives.
In: http://www.tobaccofreecenter.org/files/pdfs/en/ILL_global_cig_trade_full_en.pdf
(retrieved: 05.11.2011)
Millner, Mark (2007): Illicit trade in tobacco costing billions, says BAT chairman. In:
http://www.guardian.co.uk/business/2007/apr/27/smoking (retrieved: 05.11.2011)
Sainsburys Business Structure: http://www.j-sainsbury.co.uk/about-us/business-structure/
(retrieved: 19.11.2011)
Tescos Annual Report (2011): http://ar2011.tescoplc.com/ (retrieved: 10.11.2011)