Stock Analysis to Invest $10,000 in Four Weeks

Before investing in any stock, an investor has to assess the portfolio and determine if the investment is worthwhile. The various financial models can be used to assess the performance of the stock to the market. If the stock returns are acceptable according to a certain criterion, the investor can invest, but if they do not meet the return requirements of the investor, it is rejected (Groenewold et al., 2018). In addition, a stock may promise high returns but the volatility has to be checked. If the risk involved is too high, an investor may reject it so that they invest in stocks that are less risky.

In this Play Money paper, an investor has $10,000 to invest for four weeks. Five stocks were picked from the New York Stock Exchange which are Apple Inc. (AAPL), Facebook Inc., Amazon.com Inc. (AMZN), American Airlines (AAL), and Ford Motor Company (F). The weekly stock data was obtained from Yahoo Finance for the four weeks from 1 st June 2020 to 28 th June 2020. The performance of the individual stock prices was compared to the market indices. The first comparison was made with the S&P 500, then the next comparisons were made with Dow Jones Industrial average (DJI) and the Russell 2000 index for small caps (RUT). Some of the statistical analysis made are the descriptive statistics of the stocks to assess the mean and standard deviation of the stocks, and a multiple correlation analysis of the stock prices to the market. The correlation analysis will accurately define the behavior of the stock to the market.

Reasons for selecting the stocks:

Apple is a multinational technology company that sells consumer electronics after designing and developing them. It also sells computer and smartphone software and offers other online services. The company was selected to give a perspective of smartphone and other gadget manufacturing firms in the industry. It has had a history of excellent performance in the previous years until they started facing stiff competition from Samsung and Huawei in smartphones and other gadgets in the telecommunication industry.

Facebook is a giant social media company based in California America. The company has risen rapidly over the past decade to be one of the most used social media company. The company has also acquired several other social media companies such as WhatsApp and Instagram in a bid to reduce competition and/or increase revenues.

Amazon is an international e-commerce company based in America. It specializes in artificial intelligence, digital streaming, cloud computing and e-commerce. The company has grown over the years to be one of a kind, its founder and CEO became the first trillionaire. The company was selected from the pack to represent other online retail and wholesale e-commerce companies.

American Airlines is one of the major aircraft carriers in the USA. According to information from its website, the company boasts of the largest aircraft fleet and the highest number of passengers ferried. It also has the highest passenger revenue per mile. The company was selected to represent the transport sector.

Ford Motor Company was selected because it represents the automobile industry and/or the manufacturing sector. The company was founded in 1903 and has grown and made significant investments in other parts of the world to advance its automobile manufacturing business.

All these firms were assessed against S&P 500, Dow Jones Industrial Average and the Russel 2000 for small caps.

Analysis:

The data stock data was obtained for the period 1 st June to 28 th June 2020. The weekly stock returns were calculated by the formula below:

 (Jones & Jensen, 2016)

The descriptive statistics were also computed and the correlation analysis done to find the correlation coefficient to the market averages. The results are summarized in the section below:

The Descriptive Statistics and Correlation Analysis

Descriptive Statistics
	APPLE INC	FACEBOOK	AMAZON	AMERICAN AIRLINES	FORD MOTOR COMPANY	S&P	DJI	RUT
Mean	2.1811%	-1.9976%	2.7577%	-12.3324%	-6.8953%	-1.9287%	-2.6076%	-2.8352%
Standard Deviation	0.0105	0.0705	0.0223	0.0933	0.0448	0.0341	0.0335	0.0508

The results indicate that the Apple Inc and Amazon had average positive returns for the period while Facebook, American Airlines and Ford Motor Company had negative returns. The industry averages from S&P 500, Dow Jones and Russel 2000 also indicate negative returns for industry averages. There was a general decline in the stock returns for the firms.

For the four weeks period I would invest the $10,000 in Apple Inc (AAPL) and Amazon.com Inc (AMZN) because they have positive returns (Jones & Jensen, 2016). The share of the investment will be 50% each because they have almost similar expected returns.

Economic events that Impacted the Investment:

From December 2019 to present (July 2020), the world has faced a the COVID-19 pandemic. The economies of the world have been affected with limited trade and lockdowns to curb the spread of the virus. For example, if international travel is affected, the airline companies are adversely affected because there is no movement of people across countries, hence the high negative returns for American Airlines (Wang, 2017). Facebook has been affected by the on-going Black Lives Matter protests in the USA when its response to flagging ‘racist’ posts elicited mixed reactions. Ford Motor company was also affected by the pandemic. The increase in the returns for AAPL may be due to lower competition from Huawei that has been denied access to the American market, while Amazon’s founder and CEO becoming the first trillionaire may have made the stock of hic company rise.

Correlation Analysis of the Stocks to the Market Indices:

Correlation Analysis
	AAPL	FB	AMZN	AAL	F	S&P	DJI	RUT
APPLE INC	1.0000
FACEBOOK	0.9937	1.0000
AMAZON	0.9930	0.9736	1.0000
AMERICAN AIRLINES	0.9790	0.9956	0.9480	1.0000
FORD MOTOR COMPANY	0.1588	0.0475	0.2743	-0.0460	1.0000
S&P	0.6784	0.5921	0.7604	0.5142	0.8331	1.0000
DJI	0.6353	0.5451	0.7220	0.4644	0.8633	0.9984	1.0000
RUT	0.4811	0.3801	0.5812	0.2921	0.9420	0.9704	0.9826	1.0000

The relationship of the stock returns to the market indices is highlighted in green. All the correlation coefficients are positive values indicating that, when the average market returns increase, the stock returns also increase. All the coefficients are less than 1 indicating that they are less volatile than the market returns. A correlation coefficient higher than 0.5 indicate a strong correlation; for instance, when comparing Ford’s and Russel 2000, if the Russel 2000’s average market returns increase by 1, Ford’s returns will increase by 0.942. A correlation coefficient less than 0.5 indicates a weak relationship between the market returns and the stock’s returns. For example, if Dow Jones market average increases by 1, the American airlines returns increases by 0.4644 (Cosemans, 2017).

Conclusion

Investment in stocks should be done after thorough analysis of the market and the company. This is done through analyzing the historical data to check the future operations. A firm may have high stock value but the returns are not promising, therefore, stock returns should be the gauge to determine whether to invest. The standard deviation also shows the risk of investing in the firm, a firm whose stock returns have a high standard deviation should be avoided (Cosemans, 2017). A correlation analysis is also done to assess the volatility of the returns as compared to the market averages. All these were successfully done.

References

Cosemans, M. (2017). Long and Short Run Correlation Risk in Stock Returns. SSRN Electronic Journal . https://doi.org/10.2139/ssrn.1787576

Groenewold, N., O'Rourke, G., & Thomas, S. (2018). Stock returns and inflation: a macro analysis . Dept. of Economics, University of Tasmania.

Jones, C. P., & Jensen, G. R. (2016). Investments: analysis and management . Wiley.

Sodhi, H. (2020). Effect of Corona Virus on the Manufacturing and Supply Chain Industry across World. Industrial Engineering Journal , 13 (6). https://doi.org/10.26488/iej.13.6.1251

Wang, Y. S. (2017). The impact of crisis events on the stock returns volatility of international airlines. The Service Industries Journal , 33 (12), 1206–1217. https://doi.org/10.1080/02642069.2011.629295 

Xidonas, P., Mavrotas, G., & Psarras, J. (2010). A multiple criteria decision-making approach for the selection of stocks.  Journal of the Operational Research Society ,  61 (8), 1273-1287.