ASSESSMENT 2

1. TVM and bond valuation questions

a. $84,501.10
b. $4,388,541.03 (The operating revenue is $2.073 in millions)
c. BGA should choose investment X because it has the highest EAR rate (4.82%) compares to other
options (Investment Y: EAR = 4.55%; Investment Z: EAR = 4.30%).
d. $41,820.14
e. The yield to maturity on the bonds is 2.69%.
f. The coupon payment on each of these bonds is $3.50.
2. Risk and return estimates
a. The expected return for shares of Bega Cheese Ltd and Flyaway
 Bega Cheese Ltd
- Risk free rate (RFR): 1.75% (Source: S&P Capital IQ, Australia Government Debt -10 years on 26th
November 2021)
- Market risk premium (MRP): 3.50%
- Beta (B): 0.42 (Source: Beta S&P Capital IQ accessed on 14/Dec/2021)
 The expected return of Bega Cheese = RFR + (B x MRP) = 1.75 + 0.42 x 3.50 = 3.22%
 Flyaway
- Risk free rate (RFR): 1.75% (Source: S&P Capital IQ, Australia Government Debt -10 years on 26th
November 2021)
- Market risk premium (MRP): 3.50%
- Beta (B): 1.20
 The expected return of Flyaway = RFR + (B x MRP) = 1.75 + 1.20 x 3.50 = 5.95%
b. Portfolio expected return and beta
Table 1

Amount Contribution to Contribution

Expected Portfolio
Share Beta invested in portfolio to portfolio
return weight
portfolio expected return beta
Bega Cheese 3.22% 0.42 $0.40 40% 1.3% 0.17
Flyaway 5.95% 1.20 $0.60 60% 3.6% 0.72
Total $1.00 100% 4.86% 0.89
Portfolio expected return 4.86%
Portfolio beta 0.89
3. Risk and return analysis
Bega Cheese is an Australian based dairy processor and food manufacturer of well-known brands
including Bega Cheese and Vegermite. It has two segments: the branded segment which produces consumer
packaged goods primarily sold through the supermarket and foodservice channels and the bulk segment which
produces commodity dairy ingredients primarily sold through the business-to-business channel.
In part 2.a, I use CAPM to calculate the expected return for the share of Bega Cheese and Flyaway. CAPM stands
for ‘Capital Asset Pricing Model’ which describes the relationship between the risk of investing in security and
the expected return and it says that the expected return relies on the risk-free rate, the beta of a asset and the
market premium. Risk-free rate refers to the theoretical rate of return of an investment with zero risk. From the
part 2.a, the risk-free rate is 1.75% for both companies. It means investors have 1.75% expected return without
having any systematic risk. In addition, the difference between the expected return on the market portfolio and
the risk-free rate is considered as the market risk premium.
The beta of Bega Cheese is 0.42 (Source: Beta S&P Capital IQ accessed on 14/Dec/2021) which is less
than the average market asset of 1. It means Bega Cheese has less systematic risk the average market
assets. As we know, total risks include unsystematic risks and systematic risks. Events affecting a
particular area or industry are considered as unsystematic risks such as problems with operation of a
particular company or the failure of a new product. In contrast, systematic risk includes events that have
impacts on all areas of businesses such as inflation, interest rate movement and it is measured by beta.
For example, covid-19 pandemic is one of the systematic risks because it affects all industries
nowadays. Despite the impacts of Covid-19, Bega Cheese had a well performance through uncertain
times with revenue growth of 39% in FY2021 to $2.07 billion (Bega Cheese Limited, 2021, p.6). The
reason why Bega Cheese had less risky or volatile than the average market asset is that this company
provides essential products to customers. Further more, Bega Cheese did diversify portfolio of market
leading brands in 2021. In particular, they changed from a predominantly dairy-based commodities
company to one of the largest Australian-owned diversified food companies and added more iconic
Australian brands into their portfolio (Bega Cheese Limited, 2021, p.11). These reasons contributed to
the Beta of Bega Cheese which is less systematic risk than the average market asset. In contrast,
Flyaway has the beta of 1.20 which is greater than the average market asset of 1. In this case, if we just
look at the covid-19 pademic – systematic risk, we can see that Flyaway has more systematic risk than
the average market assets and it also means it has a lot more risky or volatile. In other words, Flyaway is
more sensitive to the events in the market and it has higher level of systematic risk.
Regarding to part 2.b, diversification of a portfolio is the key to maintain risk level at the lowest and
make an effective investment plan because some of the unsytematic risk of the individual shares will be
eliminated.
Look at the table 1, the expected return on Bega Cheese share is 3.22% while Flyaway has a higher
expected return (5.95%). The reason leads to this issue is that Flyaway has the beta of 1.20 which is
more risky than the average market asset. Therefore, if investors want to have more expected return,
they will take more risky. The advantage of putting two assets into portfolio is risk reduction compared
to hold only individual share. From table 1, once we combine these two assets together into the
diversified portfolio with 40% invested in Bega Cheese and 60% invested in Flyaway, you see that the
portfolio has the expected return of 4.86% which is actually less than what we would receive if we held
the Flyaway only. When we diversify the portfolio, it means we eliminate unsystematic risk which
affects the single asset and unique to an individual company or an asset. So the operation of the
Flyaway, the industry itself has been greatly affected by Covid pademic and that also impacted on the
operation of the business itself. So it might affect a lot of staff, its making gross revenue. However, the
portfolio expected return is greater than 3.22% that we would to be expected if we just held Bega
Cheese on its own. Because of the riskiness of the Flyaway, it is actually giving us a greater expected
return. Moreover, the portfolio beta combined these two assets is now 0.89. It is still lower than the
average market asset beta of 1. Basiclly, it has 0.89 times as much systematic risk as the average market
asset. Bega Cheese and Flyaway do business in different industries so diversification is the best way to
help investors reduce risks and maximize returns. Therefore, intead of investing only Bega Cheese or
Flyaway, investors should diversify two assets together because different assets will not react the same
way to adverse events. The combination of different assets will reduce the portfolio’s sensitivity to the
market swings. If we diversify, unpleasant movements in one will be offset by positive results in
another.
 Reference

Bega Cheese Limited 2021, Annual Report, viewed 15 December 2021,

<https://www.begacheese.com.au/sdm_downloads/2021-annual-report/>