You Will Be Coming Up With Your Own Stock Portfolio And

You Will Be Coming Up With Your Very Own Stock Portfolio And Calculati

You will be coming up with your own stock portfolio and calculating a cost of (equity) capital based on the results.

Start by selecting five U.S. publicly traded firms based on specific criteria related to the alphabet of your last name (Vincent). For each firm, find a stock with a ticker symbol starting with a letter determined by your last name and then find subsequent firms by moving five letters further into the alphabet, wrapping around if necessary, until you have five firms. For each selected firm, record its name, ticker symbol, and beta, which can be found on Yahoo! Finance under the key statistics section.

Calculate the beta of an equally weighted portfolio of these five stocks. Given a risk-free rate of 4% and a risk premium of 8%, determine the expected return on equity for your portfolio, rounded to the nearest 0.01%. Finally, compare your portfolio's risk and return profile with those of two other students' portfolios, discussing which one an investor should prefer and why.

Paper For Above instruction

Constructing an optimal stock portfolio requires an insightful selection of diverse securities, an understanding of their individual risk profiles, and a comprehensive analysis of risk and return attributes. This process encompasses strategic stock selection based on specific criteria, calculating the portfolio's overall beta, assessing the expected return, and comparing it with peer portfolios to determine investment preferences. This paper describes how to construct such a portfolio, perform necessary calculations, and analyze comparative risk and return data.

Selection of Stocks Based on Alphabetical Criteria

The first step involves selecting five U.S. publicly traded firms based on the initials of the investor's last name. Considering the example of the surname Vincent, the initial assignments follow a structured pattern starting with the first letter “V.” According to the instructions, the first stock chosen should have a ticker symbol starting with 'V.' After selecting this, the next selections are made by moving five letters forward in the alphabet from the initial letter, and wrapping around to the beginning if the end of the alphabet is reached.

For illustration, if starting with 'V' (the 22nd letter), moving five letters forward leads to 'A' (1st letter), then continuing the pattern results in 'F' (6th), 'K' (11th), 'P' (16th), and 'U' (21st). This sequence results in selecting stocks with ticker symbols starting with V, A, F, K, and U. Actual stock selection involves identifying publicly traded U.S. companies with relevant tickers from Yahoo! Finance and noting their beta values, which serve as indications of their individual market risks. For example, a stock with a beta greater than one indicates higher volatility relative to the market, while a beta less than one suggests lower volatility.

Data Collection and Calculation of Portfolio Beta

Once the five stocks are identified, their names, ticker symbols, and betas are recorded. Each stock is assigned an equal weight of 20% in the portfolio, which simplifies the risk calculation process. The portfolio beta is calculated by taking the weighted average of the individual stock betas, reflecting the overall market risk of the portfolio.

The formula for calculating the portfolio beta (βp) is:

βp = (w₁ × β₁) + (w₂ × β₂) + (w₃ × β₃) + (w₄ × β₄) + (w₅ × β₅)

where w₁ to w₅ are the weights of each stock (all equal to 0.20 in this case) and β₁ to β₅ are their respective betas. This calculation yields the combined market sensitivity of the portfolio.

Estimating Expected Return on Equity

Following Modern Portfolio Theory and Capital Asset Pricing Model (CAPM), the expected return of the portfolio (E[r]) is estimated using the formula:

E[r] = Rf + βp × (E[Rm] - Rf)

where Rf is the risk-free rate (4%), E[Rm] - Rf is the market risk premium (8%), and βp is the portfolio beta calculated earlier. Plugging in the values:

E[r] = 4% + βp × 8%

yields the expected return, which is then rounded to two decimal places (nearest 0.01%).

Comparative Analysis with Peer Portfolios

Lastly, the analysis involves selecting two other students' portfolios and assessing their risk (via beta) and expected return. Comparing these with your portfolio reveals insights about diversification, risk management, and return potential. Typically, portfolios with higher betas entail higher expected returns but also higher risk, making them suitable for aggressive investors. Conversely, portfolios with lower betas offer stability and lower returns, appealing to conservative investors. The decision between portfolios hinges on an investor’s risk tolerance, investment horizon, and financial goals. The final choice should ideally align with the investor's risk capacity and target return.

Conclusion

This process demonstrates fundamental concepts of portfolio construction, risk measurement, and return estimation based on CAPM. Constructing such a portfolio enhances understanding of market risk, diversification benefits, and the trade-offs involved in different investment strategies. Comparing peer portfolios fosters critical evaluation skills necessary for making informed investment decisions tailored to individual risk preferences and financial objectives.

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