The objective of this study is to evaluate the effectiveness of different companies in the stock market. Project portfolio management is an important activity that influences the business units’ strategies and thus investment decisions. The study focuses on ascertaining the optimality of the project portfolio decisions by evaluating how they are formulated and managed. Besides, the systematic risk is determined by the macroeconomic conditions and financial systems.
This report provides risk-return analysis by utilizing the Markowitz portfolio theory, the return on investment, expected return rate, variance, and standard deviation. Moreover, the study evaluates the relationship between the returns and the market portfolio by using the security market line(SML), beta coefficient, residual variance, correlation, and determination coefficient.
The report uses the following selected portfolio: Best Buy Co., Microsoft, Boeing Company, and Wal-Mart Stores, which constitutes actively selected portfolio(P1); CIT Group, MetLife, NVIDIA Inc., and American Express Company, which forms randomly selected company (P2); while the passive selected portfolio(P3) includes AT&T, Pennant Park Investment Inc., Medley Capital Corp., and Hercules Capital.
The stock purchased based on the performance in the market where actively selected portfolios were considered. However, the randomly selected portfolio is essential in making an optimal decision for investment purposes. This is due to the effect of portfolio theory that allows for portfolio diversification to minimize the risk while maximizing the returns for risk-averse investors. Furthermore, the passive portfolio is useful for the purposes of evaluating the effectiveness of the selected investment appraisal techniques.
This section involves a description of selected companies’ revenues, financial solvency, and financial position. The reason for selecting such companies in my portfolio are outlined in this section—the explanation based on the portfolio as P1, P2, or P3 discusses below.
P1 constitutes for companies, namely Best Buy Co., Microsoft, Boeing Company, and Wal-Mart Stores. Best Buy Co.(BBY) is a competitive provider of technological products, services, and solutions globally. The company provides affordable consumer products to different classes of consumers, small and medium businesses, either through their stores or online. The company has developed a variety of innovations to ensure all consumers globally are served. This is achieved by using a website platform(BestBuy.com), Best Buy App, or by use of engagement of company agents (Geek Squad Agents). The company’s operations are diversified across the world, with its brands traded in different countries with its headquarters in Richfield, Minnesota, U.S. The company is ranked as the best performing company in innovation, evident by its development of a unique chain of stores. The company reported an increase in revenues as of F.Y. 2020 by 1.8% increase from $42.88 billion, while the net income increase by 5.5% from $1.46 billion as of F.Y. 2019 to $1.54 billion for F.Y. 2020, which exceeds the analysts forecasted net income of $1.53 billion which is an increase by 0.65%. Moreover, the company assets increased by 20.85% from $12.9 billion in 2019 to $15.59 billion as of F.Y. 2020.
The second company under P1 is Microsoft Corporation(MSFT). MSFT is one of the largest multinational companies dealing in proprietary software for various kinds of computer technology. Microsoft’s financial results have remained very positive for the company over the years. For the fiscal year 2020, total revenues amounted to over $ 143.02 billion, an 13.65% increase over the year before. Fundamental indicators are also very stable and positive. The debt load of the company is extremely low – the Debt / Equity ratio, which determines the debt-to-equity ratio, is only 1.31. ROE 8.82% and ROA is 0.65%. The yield of the company’s securities is higher than in the industry. Thus, the company and industry’s diluted earnings per share are $ 6.20 and $ 1.97, respectively, with a profitability ratio of 30.96%.
The third company for P1 is Boeing Company(B.A.) and is the world’s largest aviation, space, and military equipment in the third quarter. The company received $ 76.56 billion for the F.Y. 2019, adjusted net income per share was $ 2.72. At the end of 2019 year, Boeing expects revenue in the range of $ 90.5- $ 92.5 billion and a profit of $ 9.9- $ 10.1 per share. Boeing has significantly strengthened its position in the civil aircraft industry by expanding the line of popular 737 aircraft and Airbus’s failure with sales of the A380. According to Boeing General Director Dennis Muilenburg, in the past quarter, Boeing put record 202 commercial aircraft and increased 737 MAX aircraft production.
The last company in P1 is Walmart Inc.(WMT), an American company that manages the world’s largest wholesale and retail trade network operating under Walmart’s trademark. Its earnings per share(EPS) is 6.93, while the P.E. Ratio is 17.41. This is implying a positive dividends performance for the company in the industry. Simultaneously, despite the effect of a very high base, the retail giant is steadily growing, and almost every quarter, its revenues increase by 0.5-2%. Its shares rise in price by 2.5%.
The second portfolio includes such companies as CIT Group, MetLife, NVIDIA Corporation, and American Express Company. Citigroup Inc is one of the largest international financial conglomerates. The conglomerate’s basis is Citibank, founded in 1812 and is one of the four largest U.S. banks. Citigroup is a large financial corporation, which has many financial units that carry out international activities, working in about 140 countries around the world. Now the company employs about 250 thousand employees. The approximate cash equivalent of Citigroup assets is 1.75 trillion dollars.
MetLife Inc. is the leading international holding in the field of insurance and pensions. Its revenue increased by 9.5% to $ 18.7 billion, and net profit jumped by almost 2/3 – to $ 2.16 billion, while the previous year the figure did not exceed 1.33 billion. Earnings per share amounted to 1.87 dollars per share against 1.14 dollars a year earlier. Such results were much better than the market forecasts – average investors’ expectations for revenue were $ 17.8 billion, and for operating profit per share, $ 1.41 (actual value is $ 1.44). As a result, the company’s shares at the opening of trading on the day following the report’s publication grew by 0.6% to $ 52.10.
NVIDIA Corporation is a leading American company dealing in graphics accelerators and processors and developer of system logic. Over the years, the share of NVIDIA in the market of discrete graphics cards has grown from 70.5% to 72.5%. AMD’s share decreased from 29.5% to 27.5%. NVIDIA’s shares are growing rapidly, and the “mania of mining,” which will bring big profits to video card manufacturers, plays an important role in this. Today NVIDIA shares may seem expensive, but investors should understand that the chip manufacturer has enough trump cards in its sleeve. This year, analysts forecast an increase in NVIDIA revenues and profits by 19% and 20%, respectively. The company has a lot of development opportunities. Although its shares may temporarily slow down or fall in price, they have enough potential for long-term growth.
Finally, American Express Company (Amex) is an American financial corporation that provides mainly consumer finance services for the issue and maintenance of payment and credit cards. American Express works with both individuals and legal entities. In the world, the number of branded cards issued by the company is 88 million pieces, and their turnover for nine months of 2016 exceeded $ 750 billion. We expect that the company’s ROE will exceed 25%, while the result of 2017, according to our estimates, should be lower than the result of the 2016 year due to one-time incomes received in the past year.
For this portfolio, the selected companies include AT&T, Medley Capital Corporation, Pennant Park Investment Corporation, and Hercules Capital.
The first company in P3 is AT&T. This is a telecommunication company whose headquarter is in Dallas, Texas, in America. The company is the largest global telecommunication company that provides both local and regional telephone services. The company is also the largest supplier of direct satellite broadcasting in the U.S. through DirecTV. It takes 18th place in the list of the largest cellular operators in the world with 135 million subscribers. It has the highest dividend yield among Dow Jones components – about 5.2%. The company successfully develops, generates solid cash flows, and carries out buyback programs. In the first quarter of 2014, earnings per share increased by 11%. Free cash flow for shareholders was $ 3 billion. Dividends for the first quarter were $ 0.46 per share; they steadily increased during the last decade.
Medley Capital Corporation is an investment company whose objective is to generate income while investing in capital products either directly through lending or buying securities from private companies in North America. The corporation has helped develop small and medium companies to expand their operation through financing or acquisition. The majority of its investment assures warrants and other beneficial equity participation characteristics, which the company uses as a strategy to achieve its positive investment returns. The company’s total value of the investment has been growing with the end of F.Y. 2017 amounts to $835.9 million. This is associated with over 68 portfolio investments in different companies with senior secured loans account 67% as first-lien, senior secured lien amounts to 12.7%, while warrants or equities constituted 20.3%.
The next company is PennantPark Investment Corporation. From inception in 2007 to the end of 2017, PennantPark deployed approximately $7 billion into over 500 companies with more than 180 sponsors. The company operates with different subsidiaries with PennantPark Investment Corporation and PennantPark Floating Rate Capital, Ltd., Forming the company’s publicly traded businesses. As of the end of the financial year 2016, the company had invested over $229.3 million in different portfolios with a yield of 11.2% of the investment.
Finally, Hercules Capital is among the P3 companies selected. The company has been growing with different motives as driven by the vision of serving the needs of entrepreneurs and public investors, as highlighted by the CEO and the founder chairman of the company in the year 2003. The company strives for alternative investment opportunities that stimulate a good venture in the world market. To achieve the strategy, built of Hercules Capital, which was publicly traded were essential and consequently led to listing in NYSE as a Business Development Company(BDC) as an enterprise having an excess value of $1.6 million, with a market cap of $1.0 million. The company is globally recognized as the largest non-bank source of financing for entrepreneurs to accomplish their goals and expand their capital base.
This section provides an in-depth analysis of the portfolio for purposes of evaluating the portfolio Risk, Return, variance, and standard deviation while making a comparison with other portfolios, that is, P1, P2, and P3. Under each type of portfolio, the selected stocks are analyzed using different approaches. It is noted that the selected stock in each portfolio varies from others since they were picked from different sectors in the stock market. The data used for analysis utilizes the financial year 2020 historical data obtained from the website.
The following is my actively selected portfolio(P1):
Name of Company
Company’s Appreciation
Closing prices (2020), $
Number of shares
Position $
Proportion of Share in portfolio
Best Buy
BBY
115
259
19471
1.8%
Microsoft
MSFT
232
7560
610260
56.8%
Boeing
BA
214
565
188427
17.5%
Walmart
WMT
148
2830
256260
23.9%
Total
1074418
100.0%
Calculating portfolio parameters
To effectively compute the portfolio parameters, return and risk of the portfolio, the study utilizes the weekly prices uploaded from historical data of each stock and S&P index for the financial year 2020. The changes in parameters and the entire portfolio, thus calculated for the report analysis.
Prices ($)
Changes (%)
Date
BBY
MSFT
BA
WMT
S&P
BBY
MSFT
BA
WMT
S&P
10/12/2020
119.35
219.66
167.35
144.71
3462.25
10/19/2020
118.21
216.23
167.36
143.85
3451.75
-0.96%
-1.56%
0.01%
-0.59%
-0.30%
10/26/2020
111.55
202.47
144.39
138.75
3264.75
-5.63%
-6.36%
-13.72%
-3.55%
-5.42%
11/2/2020
123.06
223.72
157.74
145.77
3500.75
10.32%
10.50%
9.25%
5.06%
7.23%
11/9/2020
114.30
216.51
187.11
150.54
3582
-7.12%
-3.22%
18.62%
3.27%
2.32%
11/16/2020
119.14
210.39
199.62
150.24
3554.25
4.23%
-2.83%
6.69%
-0.20%
-0.77%
11/23/2020
112.63
215.23
216.50
151.60
3636.5
-5.46%
2.30%
8.46%
0.91%
2.31%
11/30/2020
108.86
216.21
213.01
152.64
3660.5
-3.35%
0.46%
-1.61%
0.69%
0.66%
The expected returns are measured from weekly returns. The risk element of stock or portfolio is measured in terms of standard deviation from the portfolio theory. Therefore utilizing the above stock parameters and the S&P index parameters, we can compute the expected returns and the standard deviation.
Company
Share in portfolio
Expected Returns(Ri)
Variance
Standard Deviation (s)
Best Buy
1.8%
-1.31%
0.39%
6.24%
Microsoft
56.8%
-0.23%
0.28%
5.31%
Boeing
17.5%
3.45%
1.02%
10.12%
Walmart
23.9%
0.76%
0.08%
2.75%
S&P
0.80%
0.14%
3.81%
Calculating the Risk and Return for Portfolio
The purpose of creating a portfolio by investors is to achieve optimal investment by diversification of non-systematic risks. The comparison of average risk and return is essential in analyzing a well-performing stock and shares’ sensitivity to market parameters. To determine our stock’s performance with respect to the S&P index, we compute the correlations between the stocks.
BBY
MSFT
BA
WMT
BBY
1.000
0.514
-0.424
-0.237
MSFT
0.514
1.000
0.124
0.359
BA
-0.424
0.124
1.000
0.934
WMT
-0.237
0.359
0.934
1.000
The portfolio risk is given by the formula;
RP= SWi *Ri
Where
Wi is the weight of stock i,
Ri is the returns stock i
Table 1
Company
Share in portfolio
Expected Returns(Ri)
Wi*Ri
Best Buy
1.8%
-1.31%
-0.024%
Microsoft
56.8%
-0.23%
-0.128%
Boeing
17.5%
3.45%
0.604%
Walmart
23.9%
0.76%
0.182%
RP
0.634%
The return our portfolio(Rp) is 0.634%. This imply that, our portfolio is not good since it is less than the S&P index (1.83%).
To evaluate if our portfolio is optimal is calculate the portfolio risk. The portfolio risk as measured by the standard deviation is computed as follows.
Step 1: Determine the weights of the stock
Step 2: Determine the Expected returns
The first two steps presented in above table 1.
Step 3: Establish Variance Covariance Matrix
BBY
MSFT
BA
WMT
BBY
0.00334
0.001908
0.000926
0.000643
MSFT
0.001908
0.002418
0.001914
0.000965
BA
0.000926
0.001914
0.008785
0.001978
WMT
0.000643
0.000965
0.001978
0.000648
Step 4: Compute the standard deviation
The portfolio variance from the above computation is given by 0.001947. The standard deviation is the square root of portfolio variance, that is, 0.044128. Therefore, comparing to S&P index of 1.83%, our portfolio is better off and thus less risky than the S&P index.
This is a measure of excess return over a unit of risk.
Company
Expected Returns(Ri)
Risk(s)
Risk-free Rate(Rf)
Sharpe Ratio(SR)
Best Buy
-1.31%
6.24%
0.1%
-22.7%
Microsoft
-0.23%
5.31%
0.1%
-6.1%
Boeing
3.45%
10.12%
0.1%
33.1%
Walmart
0.76%
2.75%
0.1%
24.1%
Portfolio
0.63%
0.04%
0.1%
1213.6%
S&P index
-1.10%
4.80%
0.1%
-25.0%
Using this analysis, investors should choose stock with a higher SR since it assures a higher excess return for every unit of risk undertaken. Therefore, in our portfolio, Boeing is the optimal choice.
Markowitz’s portfolio theory provides a trade-off mechanism for risk tolerance and reward expectations for a given portfolio taking into account the goal of maximizing the returns at a minimum level of risk while diversifying the other securities. The theory assumes that investors are risk-averse and prefer less risky portfolio for any given returns(Mangram, 2013). Using this theory, the analysis utilizes efficient frontiers of a portfolio where the only portfolio under feasible points is considered optimal. To effectively make this analysis, the report takes a randomly selected portfolio and tries to establish the maximum return of the portfolio.
First, I compute the individual stock’s expected returns as shown below.
Computing the Individual stock risk and return
Step 1: Determine the expected returns
Prices ($)
Changes (%)
Date
CIT
MET
NVDA
AXP
CIT
MET
NVDA
AXP
10/12/2020
25
39.28
552.46
104.91
10/19/2020
31.3
40.94
543.61
100.98
25.20%
4.23%
-1.60%
-3.75%
10/26/2020
29.45
37.85
501.36
91.24
-5.91%
-7.55%
-7.77%
-9.65%
11/2/2020
31.97
40.48
582.48
96.69
8.56%
6.95%
16.18%
5.97%
11/9/2020
34.35
44.74
531.88
114.99
7.44%
10.52%
-8.69%
18.93%
11/16/2020
34.6
45.87
523.51
112.58
0.73%
2.53%
-1.57%
-2.10%
11/23/2020
34.46
47.45
530.45
120.59
-0.40%
3.44%
1.33%
7.11%
11/30/2020
34.41
46.91
535.6
119.93
-0.15%
-1.14%
0.97%
-0.55%
Company
Expected Return (Ri)
Weight(w)
CIT
4.56%
0.8792
MET
2.54%
0.0000
NVDA
-0.44%
0.0000
AXP
1.91%
0.1208
Total
100%
Step 2: Computing the Covariance matrix
CIT
MET
NVDA
AXP
CIT
0.002364
0.002565
0.001795
0.003375
MET
0.002565
0.003249
0.001268
0.004527
NVDA
0.001795
0.001268
0.006296
0.000461
AXP
0.003375
0.004527
0.000461
0.007329
Step 3: computing the portfolio risk and standard deviation
Portfolio return is 0.0424346, it is noted that the initial portfolio return equivalent to zero since the weights of stocks are zero. The calculated portfolio risk is equal to 0.002486 implying a minimum risk, and good investment opportunity.
To conclude the comparison, using the same criteria, I analyzed the passive portfolio. The passive portfolio comprise the stock of T, MCC, PNNT, and HTGC.
Prices ($)
Changes (%)
Date
T
MCV
PNNT
HTGC
T
MCV
PNNT
HTGC
10/12/2020
27.33
23.11
3.16
11.63
10/19/2020
27.82
24.35
3.08
11.53
1.79%
5.37%
-2.53%
-0.86%
10/26/2020
27.02
24
2.91
11.2
-2.88%
-1.44%
-5.52%
-2.86%
11/2/2020
27.44
23.35
3.02
11.4
1.55%
-2.71%
3.78%
1.79%
11/9/2020
28.91
23.46
3.29
12.43
5.36%
0.47%
8.94%
9.04%
11/16/2020
28.32
24.44
4.26
12.89
-2.04%
4.18%
29.48%
3.70%
11/23/2020
29.03
24.19
4.6
13.61
2.51%
-1.02%
7.98%
5.59%
11/30/2020
28.87
24.69
4.48
13.54
-0.55%
2.07%
-2.61%
-0.51%
Covariance Matrix
T
MCV
PNNT
HTGC
T
0.000681
-0.000079
0.000033
0.000702
MCV
-0.000079
0.000756
0.000687
-0.000103
PNNT
0.000033
0.000687
0.009792
0.002293
HTGC
0.000702
-0.000103
0.002293
0.001387
Portfolio Risk and Standard deviation
The portfolio return equals 0.009509, while the portfolio risk is equal to 0.000684. This depicts a lower risk for the portfolio.
The beta factor is an essential measure of the sensitivity of securities concerning the market. The factor is useful in the CAPM model as it describes the relationship between expected return and the overall systematic risk. This model is critical in the valuation of risky securities and making optimal decisions by risk averse investors (Bradfield, 2003). In essence, the beta depicts the swings in the market and the appropriate response for investment in such a security.
The beta values of my portfolio are the calculated below.
Share in portfolio
Beta
Best Buy
1,80%
0,14
Microsoft
56,80%
1,32
Boeing
17,50%
1,63
Walmart
23,90%
0,48
Beta portfolio
1,15
Share in portfolio
Beta
CIT Group
2,44%
-1,02
MetLife
16,36%
1,02
NVIDIA
52,32%
1,53
American Express Company
28,87%
0,97
Beta portfolio
1,22
Share in portfolio
Beta
AT&T
99,27%
0,42
Medley Capital Corporation
0,12%
0,35
PennantPark Investment Corporation
0,19%
1,43
Hercules Capital
0,42%
0,44
Beta portfolio
0,42
Beta values have different implications as they depict the stock’s volatility with respect to the whole market. If the value is 1, the portfolio sensitivity moves like that of the market, while a higher beta ( more than 1) implies greater volatility and high risk and vise versa for a lower beta. Besides, a higher beta implying high volatility of the stock and thus riskier has a great potential for high returns. On the contrary, the beta with a lower value is less risky but has low returns.
4.0 Conclusion
The portfolio is a collection of securities with the aim of diversifying the systematic risk as proposed by the portfolio theory. The portfolio analysis is essential in evaluating the investment decision for different investors depending on their perceived risk attitude. The portfolio analysis is part of and parcel of managerial functions in maximizing shareholders’ wealth goals and thus demands well-informed choices. Therefore, strategic decisions in portfolio evaluation need focus and necessitates development and mapping for strategic portfolio change. The portfolio of projects consisted of projects and other related work in strategic implementation. These projects contribute to the organization of their mission and vision. Projects the projects’ portfolio was a priority based on their strategic importance, financial benefits, types of projects, the complexity of the project, the level of risk, and resource requirements. The Necessary project decision is essential and should be accepted, based on a separate adoption in accordance with the policy approval group before its implementation. These results can be used in further studies and improve the effectiveness of the portfolio. Therefore, a portfolio was created which will bring a real profit. Estimating the effectiveness of a particular portfolio includes a periodic determination of execution and implementation of the portfolio, taking into account cash flows received and the accompanying risk as evaluated with respect to the investor’s risk attitude.
Bradfield, D. (2003). Investment Basics XLVI. On estimating the beta coefficient. Investment Analysts Journal, 32(57), 47-53.
Mangram, M. E. (2013). A simplified perspective of the Markowitz portfolio theory. Global Journal of Business Research, 7(1), 59-70.
Author
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