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FIN 660 Diversified Risk Stock Portfolio, Study Guides, Projects, Research of Finance

Saint Leo UniversityFinance

Diversified Risk Stock Portfolio (2 pages) For this case study, you will create a portfolio of five to eight stocks that demonstrate diversified risk. Lis t the stocks along with their current price and previous 1-year and 5-year rates of return. Below the list of stocks, address the issues described below.  Explain the difference between portfolio risk and stand-alone risk.  Briefly explain why you selected each stock and how this investment portfolio would have less risk than selecting just one stock.  How does risk aversion affect a stock’s required rate of return?  Explain the distinction between a stock’s price and its intrinsic value. Your case study should be at least two pages in length, not counting the title and reference pages. You are required to cite and reference at least your textbook and stock data source. Use APA format to cite in-text and reference citations.

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The portfolio includes stocks from large cap corporations that represent different industries:
1. Caterpillar
2. General Motors
3. Apple
4. IBM
5. Walmart
6. Target
7. Exxon Mobil
Stock prices were obtained from Yahoo Finance, and they cover a 5-year period. The
annual growth rates were calculated based on September 1st prices. Total 5-year return was
calculated using geometric mean.
Date
Stock prices
CAT GM AAPL IBM WMT TGT XOM
Sep 01, 2021 196.82 52.23 146.92 137.49 143.17 241.44 57.59
Sep 01, 2020 146.01 29.59 115.07 115.71 137.77 155.18 32.00
Sep 01, 2019 119.83 36.27 55.09 131.75 114.85 103.11 61.68
Sep 01, 2018 140.89 31.25 54.68 130.61 88.99 82.26 71.01
Sep 01, 2017 112.74 36.08 36.77 120.22 72.34 53.14 65.81
Sep 01, 2016 77.69 27.17 26.51 126.83 64.90 59.45 67.52
Date
Returns
CAT GM AAPL IBM WMT TGT XOM
2020-2021 34.80% 76.51% 27.68% 18.82% 3.92% 55.59% 79.97%
2019-2020 21.85% -18.42% 108.88% -12.17% 19.96% 50.50% -48.12%
2018-2019 -14.95% 16.06% 0.75% 0.87% 29.06% 25.35% -13.14%
2017-2018 24.97% -13.39% 48.71% 8.64% 23.02% 54.80% 7.90%
2016-2017 45.12% 32.79% 38.70% -5.21% 11.46% -10.61% -2.53%
Geometric 5-year returns
CAT GM AAPL IBM WMT TGT XOM
20.43% 13.96% 40.84% 1.63% 17.14% 32.35% -3.13%
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The portfolio includes stocks from large cap corporations that represent different industries:

1. Caterpillar

2. General Motors

3. Apple

4. IBM

5. Walmart

6. Target

7. Exxon Mobil

Stock prices were obtained from Yahoo Finance, and they cover a 5-year period. The

annual growth rates were calculated based on September 1st^ prices. Total 5-year return was

calculated using geometric mean.

Date Stock prices CAT GM AAPL IBM WMT TGT XOM Sep 01, 2021 196.82 52.23 146.92 137.49 143.17 241.44 57. Sep 01, 2020 146.01 29.59 115.07 115.71 137.77 155.18 32. Sep 01, 2019 119.83 36.27 55.09 131.75 114.85 103.11 61. Sep 01, 2018 140.89 31.25 54.68 130.61 88.99 82.26 71. Sep 01, 2017 112.74 36.08 36.77 120.22 72.34 53.14 65. Sep 01, 2016 77.69 27.17 26.51 126.83 64.90 59.45 67. Date Returns CAT GM AAPL IBM WMT TGT XOM 2020-2021 34.80% 76.51% 27.68% 18.82% 3.92% 55.59% 79.97% 2019-2020 21.85% -18.42% 108.88% -12.17% 19.96% 50.50% -48.12% 2018-2019 -14.95% 16.06% 0.75% 0.87% 29.06% 25.35% -13.14% 2017-2018 24.97% -13.39% 48.71% 8.64% 23.02% 54.80% 7.90% 2016-2017 45.12% 32.79% 38.70% -5.21% 11.46% -10.61% -2.53% Geometric 5-year returns CAT GM AAPL IBM WMT TGT XOM 20.43% 13.96% 40.84% 1.63% 17.14% 32.35% -3.13%

Standalone risk refers to the risk of investing all your money into one single asset. This

type of investment is considered very risky since the price of this asset might vary significantly

whether up or down and the profits and losses can be significant. The investor is betting

everything on the performance of one single stock and it can be a great investment or a terrible

one. If we look at the previous table, if the investor had purchased stocks from Exxon Mobil or

IBM, his/her investment would have been a very bad one. On the other hand, if the investor had

purchased Apple or Target stock, it would have been a great investment. Portfolio risk involves

diversifying risk and reducing it by investing in several assets. In this case, the average return of

the seven stocks for the 5-year period is 17.60%, which is not as high as the returns from Apple

or target, but much higher than the returns from Exxon Mobil and IBM. By diversifying risk, the

bad performance of one asset may be offset by the good performance of another asset. The larger

the diversification, the lower the risk, and the lower the potential profits.

I selected these stocks at random. I wanted to choose stocks from different industries and

that is why manufacturers are included (GM and CAT), tech companies (AAPL and IBM), large

retailers (WMT and TGT), and finally I searched for a company in the energy sector, and I chose

XOM. Diversification implies investing in different stocks and the more unrelated they are to

each other, the better. If I invested only in oil companies, their performance would probably be

similar to Exxon Mobil’s and the risk wouldn’t have decreased really. The same applies if I had

invested only in high tech stocks which carry a lot of risk but potentially very high returns.

Diversification is directly related with risk aversion. Investors are said to be risk averse

since given the opportunity to buy two assets that yield the same return, they will choose the

safest investment. This means that riskier assets must be priced at a lower value in order to

attract investors since the higher the potential return, the higher the risk, and the lower the price.

References

Mishkin, F. S., & Eakins, S. (2017). Financial Markets and Institutions (9th ed.). Pearson.

Yahoo Finance. (2021). Stock prices. https://finance.yahoo.com/quote/XOM/history?

period1=1472256000&period2=1632700800&interval=1mo&filter=history&frequency=

1mo&includeAdjustedClose=true