Essays on Principles of Financial Markets - BHP Billiton Corporation Case Study

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The paper "Principles of Financial Markets - BHP Billiton Corporation" is a perfect example of a finance and accounting case study. Before one decides to make an investment portfolio, he should take into consideration several factors. To begin with, he should consider the riskiness of the assets in the portfolio. Risk is directly related to the expected return. According to the capital asset pricing model (CAPM), a rational investor definitely invests in a portfolio that comprises high returns as much as it is risky, (Philips, 2004). To expand on these, there are two types of risks, the diversifiable and non-diversifiable risk.

The diversifiable risk is the one that has been minimized as a result of investing in so many small assets in a portfolio regardless of the small returns. On the other hand, the non-diversifiable risk is the risk that cannot be diversified and the investor will only consider a portfolio that is risky but gives high returns. The capital asset pricing model only deals with the non-diversifiable risk commonly known as the market risk. The risk is measured by using the beta.

There are several assumptions associated with the capital asset pricing model which are highly criticized. First, it assumes that the markets are perfect but in the real world, this is not true. This is because the stock market securities are wrongly priced. Another assumption of the capital asset pricing model (CAPM) is that investors have diversified their investment but in real practice, investors are afraid of doing so because they would rather invest in one company that will give a higher rate of return as compared to many which will give fewer returns.

The fact that investors can not borrow at a risk-free rate because the risk associated with individual borrowing is much higher than that associated with the government, means that in real life getting the funds will be much more demanding and thus getting riskier. For our analysis purposes in considering how to invest the $15,000, we are therefore going to assess the returns and riskiness of the companies to be chosen. Also, an assessment of the Australian stock exchange indices will be used. For investment purposes, we will invest in BHP Billiton and Rio Tinto companies.

References

‘BHP Billiton makes a Bid for Rio.’ The Age. Retrieved 2nd February 2008.

`Mergers in the fertilizer industry.’ The Economist. Retrieved 21st February 2010.

BHP Billiton official website, http// www.bhpbilliton.com/

Australian securities exchange website. www.asx.com.au/

BHP Billiton launches hostile bid for potash.’ BBC. 19th august 2010.

`BHP won’t be drawn on a Rio sweetener.’ Financial Times. Retrieved 28th November 2008

Rio Tinto completes acquisition of North limited. Business wire. Retrieved 10th November 2008.

Rio Tinto global corporate official website, http// www.riotinto.com/

Rio Tinto completes acquisition of 100% of Alcan.’ Rio Tinto. Retrieved 30th January 2008

Joseph Philips, (2004). CAPM: Certified associate in project management. McGraw- Hill/ Osborne.

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