1. Core business and Basic Estimation
Risk and return measures are commonly used to evaluate the overall performance of a company. Three FTSE 100 stocks, HSBC, RBS, and BP are chosen as the targets of the following analysis.
1.1 Core Business of Each Firm
BP Plc. is the British Petroleum Public Limited Company, which is one of the global leading oil and gas companies. It is responsible for the third largest integrated energy company. And it is recognised worldwide for its quality gasoline and chemicals, exploring and refining fuels. (The BP brand) BP has explored crude oil and natural gas in 30 countries and operated its services in more than 80 countries. As one of the top energy companies, BP has 22400 service stations and has the ability to refine 3.8 million barrels of crude oil per day. As to its core business, BP owns the advanced techniques and equipment to explore and refine crude oil and natural gas. In 2011, it is accounted for £87.1 billion for its market capitalisation. (BP Plc. Overview)
RBS Group is a global financial and banking services company owning more than 30 million customers over Europe, Asian, Americas and Middle East, anchored in UK. RBS Group provides a wide range of services and products. The core business includes the retail banking, corporate banking, wealth, and insurance, mainly in the UK, Ireland (Ulster Bank), and US. It also provides the services in global banking and markets, and global transaction services. In 2011, the total retail and commercial business was responsible for the largest proportion at 73%, especially the UK retail markets, which is accounted for 24%. As to the UK retail business, the return on equity is enhanced to 26% and the loan deposit ratio is decreased from 110% to 106% in 2011.
HSBC Group is one of the largest banking and financial services organizations in the world. Headquarter based in Canary Wharf, London, HSBC has 7,200 offices, 220,000 shareholders and 89 million customers covering 85 countries. HSBC undertakes four business groups: retail banking and wealth management, commercial banking, global banking and markets and global private banking. While retail banking and wealth management is considered to be HSBC’s core business particularly in the UK, the business group deals with individual customers. Services include personal accounts, mortgages and home buying, personal loans and credit cards, savings and investments and international services.
1.4 Estimation of Risk and Return
One of the best estimates of the return that an investor could have realized in a particular year over a period is the average return:
where T is the number of years, is the annual return on share prices. | 2007 | 2008 | 2009 | 2010 | 2011 | | HSBC | -1.94% | -3.86% | 1.99% | -0.64% | -2.56 | -1.40% | RBS | -1.27% | -15.41% | -0.05% | 0.14% | -3.61% | -4.04% | BP | 0.59% | -1.38% | 1.72% | -1.15% | 0.85% | 0.13% |
Average share price return from 2007 to 2011
The variance evaluates the risk of returns on company shares:
where T represents the time of period, is the actual annual return on share prices and is the average return.
The standard deviation could measure the risk on returns as well:
| HSBC | RBS | BP | Var ( | 0.000490 | 0.004260 | 0.000179 | SD( | 2.21% | 6.53% | 1.34% |
Variance and Standard deviation
According to the capital asset pricing model, the expected return on a security is linearly related to its beta, shown as follows:
Therefore, beta could be calculated as:
where is the average return, is the risk-free rate and