Volkswagen Company’s Risk-Return Trade-Offs Essay

Exclusively available on Available only on IvyPanda® Made by Human No AI

The present paper provides an analysis of Volkswagen AG, a world-famous car manufacturer that makes and sells cars primarily in Europe, North America, South America, and the Asia-Pacific. The company operates in four market segments, including passenger cars, commercial vehicles, financial services, and power engineering (Yahoo Finance, 2021a). I became interested in the company after the scandal in 2015 when Volkswagen admitted that it cheated on emission tests in the US using special software. I believe that the company handled the scandal really well by making a commitment to green manufacturing. Today, Volkswagen AG makes environmental and social responsibility a top priority (Volkswagen AG, 2021). This strategy allowed the company to stay profitable during the time of the pandemic when the automotive industry experienced a significant recession (Yahoo Finance, 2021a). I decided to select Volkswagen AG for the analysis, as I am thinking about investing in it.

When assessing the risks associated with investing in the company, it is crucial to consider a company’s beta. According to Vernimmen et al. (2017), beta is a measure of the volatility of a stock in comparison with the industry average. In other words, beta is a coefficient that demonstrates how much a stock price is expected to change in comparison with the market trends. Beta is calculated retrospectively by regressing the stock returns against the market returns (Vernimmen et al., 2017). Coefficients higher than 1.0 are associated with greater volatility of a stock in comparison with the stock average. Such stocks are associated with greater risks and higher returns (Vernimmen et al., 2017). Therefore, the higher the beta for a stock, the more risk-tolerant an investor should be to invest in a company.

According to Yahoo Finance (2021a), Volkswagen’s five-year beta was 1.4, which is significantly above the threshold of 1.0. Thus, investing in the company is associated with greater risks in comparison with the industry average. However, it would be unfair to say that the company is a high-risk investment. The problem with the five-year beta is that it is a retrospective view, which is hardly modified by the recent changes. According to Infront Analytics (2021), the two-year beta of the stock was 1.18, which is only somewhat above 1.0. Thus, beta analysis demonstrates that investing in Volkswagen AG is associated with slightly above-average risks.

The analysis of absolute changes in the stock prices of the company demonstrates that it was highly volatile during the past year. In particular, the minimum price of Volkswagen’s stock was $154.5, while the highest price was $480 (Yahoo Finance, 2021a). The range of the stock price change was $325.5, which was associated with significant risks. However, the changes in the stock price were associated with the COVID-19 pandemic, which had a significant impact on car sales in 2020 (Volkswagen AG, 2021). A five-year analysis demonstrates that the lowest price of the stock was $104.7 in March of 2020 (Yahoo Finance, 2021a)1. Before the COVID-19 crisis, the highest stock price of the company was $210, and the lowest price was $135 (Yahoo Finance, 2021a). Thus, it is clear that, at the moment, Volkswagen’s stock is a risky investment due to the COVID-19 crisis. As soon as the situation with the pandemic stabilizes, Volkswagen’s stocks will become a less risky investment.

When comparing Volkswagen to other companies in the industry, it becomes clear that it would be safer to invest money in Volkswagen’s competitors. The three major competitors of Volkswagen are Toyota, Ford, and General Motors. All three companies have lower five-year betas in comparison with Volkswagen AG (Yahoo Finance, 2021a; 2021b; 2021c; 2021d). In particular, Toyota’s beta is 0.64, General Motors’ beta is 1.33, and Ford’s beta is 1.14 (Yahoo Finance, 2021b; 2021c; 2021d). Thus, Volkswagen’s stock has the highest comparative risk among the company’s competitors. Toyota’s highest stock price during the past 12 months was $185.99, while its lowest price was $129.28 (Yahoo Finance, 2021b). General Motors’ highest stock price during the past year was $63.44, while its lowest price was $28.24 (Yahoo Finance, 2021c). Finally, Ford’s stock’s highest price was $16.45, while its lowest price was $6.41 (Yahoo Finance, 2021d). Thus, it is clear that Volkswagen is not the safest bet among the competitors.

If I were to decide among the four companies discussed in the present paper, I would prefer to invest in Toyota. The risks associated with the investments are minimal, as the volatility of the stock was comparatively low even during the pandemic. Since I am not an experienced investor, it would be more appropriate for me to select stocks associated with minimal risks. However, if I were an experienced investor with high tolerance to risks, it would be more appropriate for me to invest in Volkswagen, as its stock is associated with higher potential earning. The analysis demonstrates that the investment decision depends on the risk tolerance of every individual investor, as everyone needs to solve the risk/return tradeoff individually.

References

Infront Analytics. (2021). Levered/unlevered beta of Volkswagen AG. Web.

Vernimmen, P., Quiry, P., Dallocchio, M., Le, F. Y., & Salvi, A. (2017). Corporate finance: Theory and practice. John Wiley & Sons, Incorporated.

Volkswagen AG. (2021). Annual report 2020. Web.

Yahoo Finance. (2021a). Volkswagen AG. Web.

Yahoo Finance. (2021b). Toyota Motor Corporation. Web.

Yahoo Finance. (2021c). General Motors Company. Web.

Yahoo Finance. (2021d). Ford Motor Company. Web.

More related papers Related Essay Examples
Cite This paper
You're welcome to use this sample in your assignment. Be sure to cite it correctly

Reference

IvyPanda. (2022, December 18). Volkswagen Company's Risk-Return Trade-Offs. https://ivypanda.com/essays/volkswagen-companys-risk-return-trade-offs/

Work Cited

"Volkswagen Company's Risk-Return Trade-Offs." IvyPanda, 18 Dec. 2022, ivypanda.com/essays/volkswagen-companys-risk-return-trade-offs/.

References

IvyPanda. (2022) 'Volkswagen Company's Risk-Return Trade-Offs'. 18 December.

References

IvyPanda. 2022. "Volkswagen Company's Risk-Return Trade-Offs." December 18, 2022. https://ivypanda.com/essays/volkswagen-companys-risk-return-trade-offs/.

1. IvyPanda. "Volkswagen Company's Risk-Return Trade-Offs." December 18, 2022. https://ivypanda.com/essays/volkswagen-companys-risk-return-trade-offs/.


Bibliography


IvyPanda. "Volkswagen Company's Risk-Return Trade-Offs." December 18, 2022. https://ivypanda.com/essays/volkswagen-companys-risk-return-trade-offs/.

If, for any reason, you believe that this content should not be published on our website, please request its removal.
Updated:
This academic paper example has been carefully picked, checked and refined by our editorial team.
No AI was involved: only quilified experts contributed.
You are free to use it for the following purposes:
  • To find inspiration for your paper and overcome writer’s block
  • As a source of information (ensure proper referencing)
  • As a template for you assignment
Privacy Settings

IvyPanda uses cookies and similar technologies to enhance your experience, enabling functionalities such as:

  • Basic site functions
  • Ensuring secure, safe transactions
  • Secure account login
  • Remembering account, browser, and regional preferences
  • Remembering privacy and security settings
  • Analyzing site traffic and usage
  • Personalized search, content, and recommendations
  • Displaying relevant, targeted ads on and off IvyPanda

Please refer to IvyPanda's Cookies Policy and Privacy Policy for detailed information.

Required Cookies & Technologies
Always active

Certain technologies we use are essential for critical functions such as security and site integrity, account authentication, security and privacy preferences, internal site usage and maintenance data, and ensuring the site operates correctly for browsing and transactions.

Site Customization

Cookies and similar technologies are used to enhance your experience by:

  • Remembering general and regional preferences
  • Personalizing content, search, recommendations, and offers

Some functions, such as personalized recommendations, account preferences, or localization, may not work correctly without these technologies. For more details, please refer to IvyPanda's Cookies Policy.

Personalized Advertising

To enable personalized advertising (such as interest-based ads), we may share your data with our marketing and advertising partners using cookies and other technologies. These partners may have their own information collected about you. Turning off the personalized advertising setting won't stop you from seeing IvyPanda ads, but it may make the ads you see less relevant or more repetitive.

Personalized advertising may be considered a "sale" or "sharing" of the information under California and other state privacy laws, and you may have the right to opt out. Turning off personalized advertising allows you to exercise your right to opt out. Learn more in IvyPanda's Cookies Policy and Privacy Policy.

1 / 1