Assignment on Risk Analysis and Financial Ratios

Risk analysis and financial ratio analysis are highly important analysis for an investor while deciding about buying or selling shares in the stock markets. Company's risk analysis enables the investors to select a secure investment product with lower chances of loss in investment. While on the other hand, financial ratio analysis represents a big picture of overall companies performance in a fiscal year or more than one fiscal year. Considering this importance, risk analysis and financial analysis are taken for two famous companies Apple Inc. and Nokia. Both of these companies are working in the same industry therefore comparative analysis can be helpful to understand the overall behaviour of offered stock by these companies (Finance.yahoo.com, 2020).

Financial and risk analysis of Apple Inc. includes information about profit margin, return on assets, return on equity, beta, price to book ratio, and current ratio. Following analysis, the profit margin of Apple Inc. (21.49%) is higher than Nokia (0.03%). Moreover, ratios of the return on assets and return on equity (11.58% and 55.47%) are also higher than the ratios of (ROA 1.68% and ROE 0.12%) Nokia. Somehow, according to analysis beta value of Nokia (0.01) is lower than the beta value of Apple Inc. (1.29%) which indicate that investors investing in Apple will have a greater risk on return as compared to investors of Nokia Company (Finance.yahoo.com, 2020).

Moreover, price to book ratio is also an important financial indicator which is also supportive of the investors of Nokia. Apart from all these, liquidity analysis taken with the current ratio of both companies indicates the strength of Nokia Company to meet its short term obligations easily as compared to Apple Inc. Thus, conclusively Apple Inc. seemed riskier.

Historical Standard Deviation and Stock Volatility

           The historical standard deviation of stock returns represents the actual risk factor hidden behind the fluctuation of share prices. Share prices never remain static. It fluctuates based upon changes in the market demand for shares or supply of shares in the market. Analysis of standard deviation can help us understand which stock has more risk or price stability. To calculate standard deviation and volatility, we have taken closing prices of both stocks from yahoo finance. According to the analysis of historical standard deviation and stock volatility on an annual basis, we can say that Apple Inc. has more volatility as compared to Nokia company.

According to the above mentioned table, the standard deviation value of Nokia company is 0.0481 daily. While daily volatility (SD) of Apple Inc. is 0.0493 which is a little bit greater than the Nokia Company. The values of annual volatility are calculated by using 365 days as the whole duration. Again difference of 0.0219 represents more volatility in the annual stock return of Apple Inc.

Implied Volatility of Options

Implied volatility is calculated for six different trading options available for Apple Inc. and Nokia (3 and 3 respectively). A call option provides the opportunity to the buyers to buy shares at strike prices if it seems beneficial to them. In this analysis, three kinds of money options are selected to buy a stock of Apple Inc. and Nokia Company. Three options of money are known as "In the Money", "Out the Money" and "At the Money". An exercise price of stock higher than strike value represent Out the Money call option. While exercise price less than or equal to strike price represents "In the Money" and "At the Money" trading options respectively. Considering these basic rules some options are selected for Apple Inc. and Nokia Company.

According to the above-presented table, Apple Inc. has implied volatility of 261, 13, 93.09, and 4.904 for 20 days the same duration with different strike values, last prices, and trading volume. While on the other hand, Nokia has -0.27, -0.083, and 0.086 implied volatility values with a minimum of 2% and a maximum 3% risk-free investment products. Nokia options are purchased based upon the various types of money In the Money”, “Out the Money” and “At the Money”.

Conclusion of Stock Return

The whole discussion concludes that Apple Inc. has a higher profit margin and return for its investors as compared to Nokia Company. However, at the same time, Apple has greater risk factor regarding investment returns and liquidity conditions which makes Nokia a better and secure investment company.