Investment Analysis of BHP Billiton Company Case Study

Investment Analysis of BHP Billiton Company - Case Study Example This research will begin with the statement that Commonwealth Bank of Australia is a company that is based on Sydney Australia, it as founded in 1911 and its main line of business is provision of various banking and financial products and services to retail, small businesses corporate customers as well as institutional customers in Australia, New Zealand, the Asia pacific region, United Kingdom and the United States. An event study was carried out to determine the impact of the announcement of the 25 basis points decrease in cash rate by the Reserve Bank of Australia on 6th December 2011. The event window used to carry out this event study is the 10 days before the event announcement date, the event announcement date and the 10 days after the event announcement date denoted as day -10 to day +10 and the event announcement date is day zero. The estimation period on the other hand is period between day -510 and day -11. The closing adjusted weekly prices for the Commonwealth Bank of Au stralia and the all ordinaries index were obtained from yahoo finance for the estimation period and the closing adjusted daily prices were also obtained from yahoo finance for the event window. The all ordinaries index represents the market returns. The weekly returns of the Commonwealth Bank of Australia and the weekly logarithmic returns of the All Ordinaries Index were calculated using the formula ln (Pt/Pt-1) where Pt is the adjusted closing price of the security at time t and Pt-1 is the adjusted closing price of the security at time t-1.... indicating that regressing the returns of the CBA on those of the All Ordinaries index would yield a better result that will incorporate the effect of the outliers (Uliana Flynn & Correia, 2007). The regression result is as shown in table below. As shown in the table above, the value of alpha as represented by the intercept is equivalent to 0.00094 while the value of beta is equivalent to 1.00742. This indicates that the regression equation representing the relationship between the CBA returns and the Market returns as represented by the All Ordinaries Index is equal to Y = 1.00742x + 0.00094. This is the market model where Y is the dependent variable which is the expected returns of the Commonwealth Bank of Australia during the event window while x is the independent variable which is the market returns during the event window and alpha is the constant which is otherwise referred to as the intercept (Uliana, Flynn and Correia, 2007). Market model adjusted abnormal returns The market model adjusted abnormal returns is equivalent to the difference between the expected returns and the actual returns of Commonwealth Bank of Australia during the event window. The abnormal returns are the accumulated to arrive at the cumulative abnormal returns of the Commonwealth Bank of Australia during the event window as shown in the table below; As shown in the table above, the abnormal returns are given by the actual returns minus the expected returns of the Commonwealth Bank of Australia during the event window. The expected returns are calculated using the market model shown above. Findings As shown in the market model above, the beta of the Commonwealth Bank of Australia is equivalent to 1.0074 indicating that it is a growth stock because it has a beta that is more than one. In