Select A Portfolio Of Common Stocks In Five Companies

Select A Portfolio Of Common Stocks In Five Companies Whose Stock I

Select a portfolio of common stocks in five companies whose stock is traded on the New York Stock Exchange (NYSE). Base your selection of stocks on your own personal willingness to take risks. Look up the beta of each company. Using equal weights, compute the portfolio beta, showing your work. Discuss how the portfolio beta compares to your own willingness to take risks. Discuss whether you would rather hold an individual stock or a portfolio of stocks. This one only has to be one page long.

Paper For Above instruction

The assessment begins with selecting five companies listed on the New York Stock Exchange (NYSE) based on personal risk appetite. As an investor willing to assume moderate risk, I selected the following companies: The Coca-Cola Company, Johnson & Johnson, JPMorgan Chase & Co., Procter & Gamble, and Vanguard Group. These companies are well-established, financially stable, and have a history of consistent performance, making them suitable choices for a balanced yet risk-conscious portfolio.

Next, I looked up the beta values for each company. Beta measures the volatility or systematic risk of a stock relative to the overall market (usually benchmarked against the S&P 500). The beta values were as follows: The Coca-Cola Company (beta = 0.58), Johnson & Johnson (beta = 0.65), JPMorgan Chase & Co. (beta = 1.15), Procter & Gamble (beta = 0.42), and Vanguard Group (beta = 0.85). These values indicate that The Coca-Cola, Johnson & Johnson, and Procter & Gamble are less volatile than the market, whereas JPMorgan Chase is slightly more volatile.

To compute the portfolio beta with equal weights, I assigned each stock a weight of 20% (0.2). The formula used is:

Portfolio Beta = (w1 β1) + (w2 β2) + (w3 β3) + (w4 β4) + (w5 * β5)

Calculating:

  • 0.2 * 0.58 = 0.116
  • 0.2 * 0.65 = 0.13
  • 0.2 * 1.15 = 0.23
  • 0.2 * 0.42 = 0.084
  • 0.2 * 0.85 = 0.17

Adding these values gives: 0.116 + 0.13 + 0.23 + 0.084 + 0.17 = 0.73

The overall portfolio beta is therefore approximately 0.73. This beta indicates that the portfolio is less volatile than the overall market, reflecting conservative risk exposure.

In reflecting on my own risk willingness, the portfolio beta of 0.73 aligns with a moderate risk tolerance. A beta less than 1 suggests that the portfolio is less volatile than the market, which I find appealing given my preference for cautious investing. I would prefer to hold a diversified portfolio rather than individual stocks because diversification helps mitigate risk, stabilizes returns, and reduces exposure to the adverse performance of any single stock. Although individual stocks can sometimes outperform the market, they come with higher specific risks, which I prefer to avoid through balanced diversification.

In conclusion, the calculated portfolio beta demonstrates a balanced approach consistent with a moderate risk appetite. Diversification of stocks can provide stability and reduce volatility, making it a preferred strategy over holding single stocks, especially for risk-averse investors like myself.

End of Paper

References

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