Portfolio Construction and Analysis

Beta and Portfolio return

Jonathan Max Burkett

Capella University

Portfolio analysis

My portfolio comprises stock from five major companies which are promising to have very attractive returns. The companies include Toyota Motors Corporation, Ford Motors Company, Fiat Chrysler Automobiles, Novartis AG, and Pfizer Incorporation as well as Eli Lilly and Company. The article is a report on the portfolio analysis obtained from analysis of the company’s stock returns for the past week. The analysis included the stock risk and expected returns based on their daily movement in the stock market.

The first analysis is on the stock risk which is obtained by calculating the stock’s beta, a stocks beta is obtained from the variance of the daily stock closing prices. The other factor involved in calculating the stocks beta is the covariance between the stock and the benchmark asset, the S&P 500 is used in this analysis as the benchmark asset. Based on the above factors, the stock register different beta which depends on the variance and the covariance of the asset with the market benchmark. The stock have a beta of less than one although some have positive beta while others have a negative beta. The stocks are in line with my investment objectives which is to maximize returns while minimizing risk which depends on my ability to diversify the stocks

Most of the stocks have a positive beta which is less than one, this means that although the stocks have a positive movement with the market, they tend to be less volatile than the market returns. The stock with the same stock returns movement as the market are the Pfizer Incorporation as well as Eli Lilly and Company. This stocks will have their returns vary in the same way as the market variations. There are also stocks that move in different directions with the market returns. The Novartis AG is included in my portfolio since it has a negative movement compared to the market returns, it therefore means the stock is very important in diversifying market risks. There are stocks with a beta of zero and they also form an integral part of my portfolio since they are neither positively nor negatively related to the market returns, it therefore means that they do not change compared to the market returns, the two stocks are Toyota motors stock and Fiat Chrysler Automobiles.

The analysis goes further to the expected stock returns which is obtained from online calculator. The expected individual stock returns help in calculating the expected portfolio return based on the weights of the stocks and their respective expected returns. The resulting figure from the calculation is 3.445% which is higher than the market returns and also the risk free rate returns. This means that the stocks are well performing since the risk premium is positive and therefore doing away with some of the stocks will mean a negative returns for my portfolio. Although the returns are positive, they are quite small and this means that there is need to review my portfolio by either adding more assets with higher returns or exchanging the returns. On the other hand, since the diversification of the portfolio enables gaining when the market is performing poorly, there is also the option to retain the stock in my portfolio the same way they are but changing their weights in the portfolio.