Case B

a) The return volatility (Standard deviation) of NEXT Plc and ASOS Plc is 32.2% and
77.1%, respectively, indicating investment in ASOS Plc is more volatile or risky than
NEXT Plc.

The Beta of NEXT Plc and ASOS Plc are 0.3x and -0.8x, respectively, indicating the
price of NEXT Plc is more correlated with the market index movement than ASOS Plc.
If the index increases 1.0%, then the price of NEXT Plc increases 0.3% and the price
of ASOS Plc declines 0.8%.

The Standard Deviation measures a company's total risk (both systematic risk and
company-specific risk); on the other hand, the Beta only measures the systematic or
market risk. It is to be mentioned that the systematic or market risk is the unavoidable
risk (like inflation, interest rate changes, war, natural disasters etc.) that impacts the
entire market or a large sector of the market, not just a single stock. On the other hand,
the unsystematic or company-specific risk is the risk that impacts a specific company.

b) The Beta of NEXT Plc and ASOS Plc are 0.3x and -0.8x, respectively, indicating the
price of NEXT Plc is more correlated with the market index movement than ASOS Plc.
If the index increases 1.0%, then the price of NEXT Plc increases 0.3% and the price
of ASOS Plc declines 0.8%.

Despite doing business in the same sector, the betas of these two companies are
significantly different. Our analysis reveals that the reason behind this difference is the
underlying growth prospect of the two companies. NEXT Plc is a mature company with
limited upside potential, whereas the ASOS Plc is in a growth phase with high
prospects. Thus, the price of NEXT Plc is more correlated with the market index than
ASOS Plc's.

c) To calculate the Required rate of return, we have used CAPM model. The precise
calculation is given in the table below:

NEXT ASOS
Particulars
Plc Plc
Risk Free Rate (annualized) (Rf) 1.4% 1.4%
Beta (b) 0.28x -0.84x
Avg. Return of the Market Index FTSE (Annualized) (Rm) 1.5% 1.5%
Required Rate of Return (Re)= Rf+b(Rm-Rf) 1.4% 1.3%

From the above calculation, we can see that NEXT Plc's Required Rate of Return is
higher than ASOS Plc's due to the higher Beta.

In the above calculation, the Required Rate of Return is related to the company's Beta.
The Beta is calculated from the Covariance between the stock's historical monthly
return and the market's historical monthly return, along with the Variance of the market
index.

d) Historical data is suitable mainly for mature companies with limited business change
possibilities for judging a company's future performance. For a start-up or firm in its
growth stage, judging the future performance based on historical data is difficult as
these companies dramatically change their business model or take significant
development steps to grow.

Based on my above analysis, I think predicting the future performance of NEXT Plc
would be more appropriate than ASOS plc due to their different life stages.

Summary

• From the above calculation, we can say the return volatility of ASOS Plc is higher
than NEXT Plc but the betas, indicating the systematic risk of these companies,
summarize that NEXT Plc has higher systematic risk and is better correlated with
the market index than ASOS Plc.
• To compute the risk-return trade-off, we have calculated the Coefficient of Variation
of these two stocks with their monthly average return and standard deviation. The
coefficient of variation determines how much volatility, or risk, is assumed
compared to the amount of return expected from investments. The lower the ratio
of the standard deviation to mean return, the better the risk-return trade-off. The
calculated results are given below.

Particulars NXT Plc ASOS Plc

𝑆𝐷 2.2 32.4
Coefficient of Variation (CV) = 𝐴𝑣𝑔.𝑅𝑒𝑡𝑢𝑟𝑛

We can conclude from the above result that the NXT Plc may provide a better risk
return trade-off than ASOS Plc.