Karoon Gas Australia Limited

Question: Discuss about theKaroon Gas Australia Limited. Answer: Introduction The mean, standard deviation, variance, coefficient of variation and correlation coefficient for the two sub periods for Karoon Gas Australia Ltd. and the market is presented below: Karoon Gas Australia Ltd. Market Sep 2013 to Jan 2015 Feb 2015 to June 2016 Sep 2013 to Jan 2015 Feb 2015 to June 2016 Mean -21.02% -15.17% -18.19% -12.15% Standard variation 0.149 0.124 0.045 0.045 Variance 0.022 0.015 0.002 0.002 Coefficient of variation -0.712 -0.823 -0.25 -0.37 Coefficient -correlation 0.468 0.522 Beta 1.538 1.448 (Yahoo. Finance, 2016) Karoon Gas has a higher mean return in both the periods as compared to the market. The returns have decreased in the sub period February 2015 to June 2016. This is due to a fall in the price of the shares in 2015 and 2016, thus decreasing the returns on the company shares and the market. The company is generating higher returns as compared to the market. Karoon Gas has a higher standard deviation in both the periods as compared to the market. This means it is more risky. However, the standard deviation and the variance have decreased in the later sub period as the returns have also decreased. Coefficient of variation represents the volatility of the returns i.e. the risk assumed for an expected level of return. It is the ratio of standard deviation to the mean. Lower the ratio, the better it is. However, since the value is negative, it is difficult to comment on the same. Coefficient correlation is the relationship between two variables. In this case, it measures the relationship between the returns of Karoon Gas and the market returns. Since the coefficient correlation is positive in both the periods it means that the prices of shares of Karoon Gas move in tandem with the market index. If the market index increases, the share price of the company also increases. The correlation is stronger in the period from Feb 2015 to June 2016. This means the change in return of the share is higher with a change in market return in the second sub period. Beta is the volatility of the returns of a stock in relation to the returns of the market. Higher the beta, higher is the volatility of the stock and vice versa. The beta of market is assumed to be 1 and the beta of the company stocks is then compared with the market beta to determine the volatility of the stock. The beta for the shares of Karoon Gas is 1.53 in the first sub period which means the shares of Karoon Gas are 53% more volatile than the market index. The beta for the second sub period is 1.44 which means the company stocks are 44% more volatile than the market index. Since the beta for both the sub-periods is more than 1, it means the movement of the company stocks is more than the market index movement. However, the stocks are more volatile in the first period as the beta is higher. This means that the returns provided by the company shares in the first sub period will be higher than the market returns. The estimated value of beta is different for the two sub periods as there is difference in the returns of the stock and market and also a difference in the standard deviation of stock and market in the two sub periods. The standard deviation of the stock is higher in the first sub period due to which the stock becomes more risky and volatile. As the risk of a stock increases, the beta also increases as the beta is a measure of risk itself. However, the standard deviation of the market is the same in both the periods. Also the coefficient correlation is lower in the first sub period. This means that the movement of the company stocks in relation to the market is lower as compared to the first period. This increases the volatility between the stock and the market. Hence both higher standard deviation and lower coefficient correlation together increases the volatility of the stock in relation to the market and hence the beta is higher. Whereas for the second sub period, the standard dev iation for the stock is lower while the standard deviation of the market remains the same, and the coefficient correlation is also higher which renders positive movement between the stock and the market, thus reducing the stock volatility. Thus, lower standard deviation coupled with higher coefficient correlation reduces volatility of the stock in relation to the market and thus a lower beta value is obtained. (Damodaran, NA) References Damodaran, A., (NA), Estimating Risk Parameters, accessed online on 20th September, 2016, available at https://people.stern.nyu.edu/adamodar/pdfiles/papers/beta.pdf Yahoo. Finance, (2016), Karoon Gas Australia Ltd. (KAR.AX), accessed online on 20th September, 2016, available at https://au.finance.yahoo.com/q/hp?s=KAR.AX Yahoo. Finance, (2016), All Ordinaries (^AORD), accessed online on 20th September, 2016, available at https://au.finance.yahoo.com/q/hp?a=b=c=d=8e=22f=2016g=ds=%5EAORD%2C+ql=1