The professor seeks to form a portfolio form the stocks of General Motors, Oracle, general electric and Microsoft. The professor must consider issues like the risk level and type of risk for each portfolio, the industry in which the companies operate the impact of inflation on the stock the return on investment of the selected stock, the level of diversification required and the level of speculation to avoid a liquidity crisis and losing the gains. The lecturer must, therefore, conduct a delicate balance on the selected stock to ensure that the expected return of the portfolio is high and less risky. The goals and objectives of creating a portfolio are to diversify risks and maximize the return on the portfolio. Another objective is growth or even preservation.
A stock portfolio can help an investor to weather different stock market conditions. Value can also be added to the portfolio especially for risk takers. Value investing is one strategy that can be used to add value by selecting stocks that are undervalued and therefore provide an investment opportunity. Undervaluing can be as a result of restructuring, management change, or bad publicity that affected the stock price. Another way is to look for companies that have strong fundamentals and likely to pay higher dividends. Price-earnings ratio can be a good indicator of the performance of a company. Similarly, identifying unique businesses can help investors who hold shares of known companies operating in the current market.
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Investing in the stocks of any one of the four companies requires a clear understanding of their historic performance and their industries. Similarly, the investor must be able to estimate the risk-return rates of the companies to determine the most profitable investment. The efficiency of a company or industry, the risk-return profile and ability to add value makes an investment worthwhile to consider. The above portfolio can be ideal but some of the companies in the portfolio have lower returns compared to others like Amazon, Walmart, and Apple which can also be considered as potential investments.
Oracle seems to be the riskiest of the stocks whereas General Motors is the least risky in the portfolio. The expected return of each stock is directly proportional to its risk. As the risk level increases so do the return of the stock, therefore, the return of each stock increases with risky stocks. If the professor makes a portfolio with equal weights of 25% the resulting portfolio position will have a portfolio return of -96906 a variance if 0.034017 and a standard deviation of 0.184436. each stock directly affects the investment by diversifying risks and reducing the risks that the lecturer is exposed to.
The correlation of the stock shows the how the return on assets rare related and their relationship to the market in general. The investors, in this case, can use the concept to reduce risk. The correlation and the returns of the stocks show that the two are closely related. Beta measures the risk of each individual stock and is used by investors to determine whether they can invest in a stock or not. Stocks with high risks also have higher returns and therefore risk lovers are likely to invest in such stocks as they are likely to benefit from high returns. Investors are likely to select a portfolio that minimizes the risks they are exposed to yet maintaining high returns for their investment.
The required rate of return for each stock combines the risk-free rate, the beta and the return of the market to determine how much each individual stock should return. The required rate of return shows that General Motors and General Electric have low rates of return compared to the return of the market. It is evident that the two stocks have lower returns even though they are less risky.
From the analysis, the portfolio should not include the stocks for general motors and General Electric. Their returns are lower and therefore they do not add value to the investment. The variability of the stock indicates that the lecturer should try another high risk, high return stocks for investment purposes. New companies that pay dividends to the investors or those that have strong fundamentals are potentially good for investment. Similarly, the investor should consider undervalued firms that have a higher potential for growth for investment purposes as opposed to going for matured firms.
