China Airlines Bond Investment - Research Paper Example

China Airlines Bond Investment Analysis Student’s Name Institutional Affiliation Introduction In the modern world, potential investors have become more enlightened on the need for having a number of investment options within their respective portfolios in order the level of risks. Most of the portfolios in place are characterised by a combination of stock options and bonds (Statman, Thorley, & Vorkink, 2006). Stock options are considered to be more risky given that they fluctuate in their values since they are affected directly with the external influences of the market forces. On the contrast, bonds are less risky because they carry certain and known value that is set to mature at the end of a specified period. However, stock options, despite being risky still possess the capacity to translate investments into high expected returns (Statman, Thorley, & Vorkink, 2006). On the contrary, investors still will like to include them in their investment portfolios as a means of reducing possible risks that emanate from different market changes. The focus of this report rests on the evaluation of the data belonging to Chinese Airlines shares as well as the imminent performance on the Vanguard Total Bond Market Index in regards to the firm for the period between July 2012 and December 2014. In essence, the evaluation of these data is set to determine the portfolio standard deviation while still making sure to establish which of them has performed better in the period at hand. In fact, it seeks to analyse the level of riskiness for a potential investor engaging in the investment with the assumption that both of these options possess an equal level of weighting. Chinese Airlines: Background Information China Airlines was founded in 1959 with its stocks having been listed in 1993. The company has currently employed over 9,900 employees in Taiwan and another 2,011 outside of this region (China Airlines, 2014). The firm has a total of 87 aircrafts of Boeing design and Airbus, which also includes 66 passenger aircrafts and another 21 cargo aircrafts (China Airlines, 2014). The Airline is deemed to be the largest and the flag carrier of Taiwan. It boasts of more than 1,400 flights weekly to at least 118 airports in different cities across the world. Currently, it has three key airline subsidiaries that include; the Mandarin Airlines, which operates domestic flights and those related to the low-demand region destinations, China Airlines Cargo, which conducts operations of fleets related to freighter aircraft while still manages engage in the management of parent airline on cargo-held capacities and, finally Tigerair Taiwan, which is deemed to be a low-cost carrier that was developed by both China and Singapore Airlines (China Airlines, 2014). In the United States of America, the firm engages in provate bus service operations especially in airports with the company’s flights to other areas. In the past period, the firm had made sure to operate free bus services in such destinations as Texas and Abu Dhabi within the UAE (China Airlines, 2014). This was a marketing strategy that improved on its service delivery as well as revenue collection and this can be noted with the airline having been crowned the 10th largest in the world. Vanguard Total Bond Market It is important to note that potential investors engage in intensive analysis of the securities market to establish the different forms of investments to pursue. Bonds, by far, are one of the most sought after securities in the market (Statman, Thorley, & Vorkink, 2006). They are preferred, in most cases, because they are less risky given that the issuerer of the bond promises to repay the investment amount at certain dates and specific fixed amounts hence helps harmonize the overall investment portfolio. VBMFX is a popular global bond market mutual fund with the largest placements in comparison to other noted platforms (Nofsinger, 2008). This platform is focused on investments of a wider and market-weighted bond index as it integrates numerous levels of public and fixed-based income securities that might involve corporate, government-based and internationally-focused bonds. Selection of mutual fund investment is done through sampling procedures while the VBMFX is the resultant asset-base that is placed on a diversified range of long-term investors and quest of a low-cost central bond holding notions. Objective of the Analysis The fundamental goal of this analysis is to compute the portfolio standard deviation for the firm and thereafter; establish the investment option that has performed in a successful manner in the period between July 2012 and December 2014. In essence, the analysis also entails conducting a thorough assessment of the risk levels of investing in both of the options at hand while still applying an equal measure of weighting of 0.5. Methodology The analysis at hand embraces a descriptive research design since it forms a proper way of portraying end results in a clear and direct manner and does not accommodate any form of biasness. It is important to ascertain that the entire analysis adopted secondary data collected from both the company website as well as Yahoo Finance and has been subjected to MS Excel evaluation techniques. Result Findings The process below was adopted to establish the overall portfolio standard deviation; first, the analysis took to calculating the expected returns as well as standard deviation as shown in the table 1 below; Table 1 Standard Deviation CAL 0.022 VBMFX 0.002 In the table 1 above, 0.022 indicates the standard deviation for expected returns in China Airlines while the 0.002 represents the standard deviation for VBMFX. Secondly, the analysis engages in the calculation of the correlation for both China Airline and VBMFX of -0.000001 using the correlation matrix as shown in table 2 below; Table 2   JAL VBMFX CAL 0.000480384 VBMFX -0.000001 4.04855E-06 The last process is computing the overall portfolio standard deviation using the formula below; SQR 0.52*0.0222 + 0.52*0.52 + 2*0.5*0.5*-0.000001 = 0.011+0.0625-0.0000005 =0.073*100%, =7.3% The results above indicates the level of risk for investing in both of the portfolios is high at 7.3% Hence it will not be fair to make investments with the portfolio in whatever case (Damodaran, N, d). Conclusion From the discussion above, it can be seen that the process of practicing diversification of portfolios is indeed crucial in reducing the level of risk. By analyzing the risk level of a portfolio made up of bonds and stock options from China Airlines indicates a high risk level of 7.3%, which is too high to prompt investment. References China Airlines. (2014). About US: Company history. Retrieved on December 13, 2015 from https://www.china-airlines.com/us/en/about-us/index Damodaran, A. (N, d). Picking the right investments analysis. Retrieved on December 13, 2015 from http://people.stern.nyu.edu/adamodar/pdfiles/cf2E/inv.pdf Nofsinger, JR. (2008). The Psychology of Investing. 3rd ed. Pearson/Prentice Hall. Statman, M, Thorley, S & Vorkink, K. (2006). Investor Overconfidence and Trading Volume / Review of Financial Studies, 19, 1531-1565 Read More