Answer To: Select 4 equity stocks (from 4 different industries/sectors: scroll down forindustry info)...
Mayuri answered on Dec 16 2022
1. Equity stocks chosen
IBM
The international business machines corporation (IBM) is an American multinational technology corporation which was founded in 1911 by Endicott in new york. Now it has working operation in more than 171 companies. It was started by the name CTR but later got its name of IBM in 1924. Its main operation is to sell computer hardware ,middleware and software and is one of the largest work providers with more than 250k people
Bank of America Corporation
The bank of America corporation (often abbreviated bofa or boa) is an American multinational investment bank and financial services holding company headquartered at the bank of America corporate centre in charlotte, north Carolina. The bank was founded in san Francisco and took its present form when NationsBank of charlotte acquired it in 1998
It is the second largest bank in terms of market capitalization and serves more than 10% of Americans deposits
Tyson Foods
Tyson foods, Inc. is an American multinational corporation which was founded in 1935, 87 years ago. Based in Springdale, Arkansas, that operates in the food industry.
It is the world second largest producer of beef chicken and pork and the largest exporter outside usa
. Together with its subsidiaries jimmy dean, Hillshire farm, ball park, wright brand, aid ells, and state fair.] Tyson foods ranked no. 79 in the 2020 fortune 500 list of the largest united states corporations by total revenue.
Chevron corporation
chevron corporation is an American multinational energy corporation that is active in more than 180 countries and is engaged in every aspect of oil and gas business. It is the second-largest known direct descendant of standard oil with it’s headquartered in san roman
Its traces its history to 1870s and grew quickly after the breakup of standard oil by acquiring or partnering with different firms its revenue in 2021 was $162.47 billion dollars.
2. Average annual return
The average annual return (AAR) measures the money made or lost by a mutual fund over a given period. Investors considering a mutual fund investment will often review the AAR and compare it with other similar mutual funds as part of their mutual fund investment strategy.
To get AAR from daily frequency data
· First we will need to calculate average holding period
· For this we need to use the formula
r= ( pt - pt-1) / pt-1
· Then we will add average holding period to get average return. We have calculated the annual return of the selected companies.
IBM
BOA
TSN
CVX
Annual return from 1 nov 2018 to 31th dec'2018
-0.79
-10.79
-14.17
-0.41
Annual return from 1 jan'2019 to 31st dec'2019
23.28
40.67
58.35
15.91
Annual return from 1 jan'2020 to 31st dec'2020
7.24
4.72
-19.83
-11.14
Annual return from 1 jan'2021 to 31st dec'2021
18.07
43.56
34.71
41.03
Annual return from 1 jan'2022 to 10th oct'2022
6.90
-15.14
-21.00
49.20
Average annual return
10.94
12.60
7.61
18.92
· After adding annual returns of all years and dividing it by number of years we will get average annual return
Company shares
Average annual period
IBM
10.94%
BOA
12.6%
TSN
7.61%
CVX
8.92%
3.
Standard deviation
Standard deviation of a stock is a very good tool to know how versatile a stock is.
That means how risky can our investment can be as high standard deviation means higher risk as the share of that company violates frequently from high to low and vice versa.
To get standard deviation we need to use the following formula if we have average holding period
S.D
Company
IBM
BOA
TSN
CVX
S.D.
1.80%
2.39%
2.06%
2.40%
Here we can see that CVX has the highest standard deviation that means it is the most risky from the selected stocks where as IBM has the lowest standard deviation which means it is the least risky one among the stocks present.
4. Risk
Risk can be measured using standard deviation from the below table. The below table can be used an analysis of S.D. affected during the COVID period.
Company
IBM
BOA
TSN
CVX
Standard deviation before COVID
1.42%
1.52%
1.60%
1.30%
Standard deviation in COVID
1.95%
2.70%
2.24%
2.77%
Return
Return refers to how much we have gain in our investment.
Company
IBM
BOA
TSN
CVX
Return before COVID
38.09%
28.58%
33.59%
6.39%
Return in COVID
16.61%
34.44%
4.46%
88.19%
As we can see that the return to us before COVID was more in case of technology and food sector where as the reverse can be seen in banking and energy sector.
This is due to the fact as manufacturing has a verge big impact on the production of stuffs where as high increase in sources of power was required so that people will not try to come out if they have something to do at home and increase in bank due to increase in stuffs that can be realized in cash faster
However the risk has increased in all the stocks due to the market condition which benefitted some sectors but made it bad for the majority . Also one sector is dependant on the other so a single shockwave can cause vibration in all the stock market
5. Cross correlation
During the study of two fluctuates at the same time and we observe that the one changes when there is some change in other variable directly or indirectly, it will be known as the two fluctuators are correlated. If the one changes and there is no change in the other, it will be known as non-correlated variables.
Cross correlation
RIBM
RBOA
RTSN
RCVX
RIBM
1
RBOA
0.616315
1
RTSN
0.379211
0.433192
1
RCVX
0.550382
0.662619
0.410249
1
When we analyse the correlation between the return of the IBM it is coming to one because the collaboration should between a single data will be the one. Comparing to the correlation between IBM and the Bank of America is 0.616 which means that they have the positive correlation between them and they will be affected the same goes with the correlation between IBM and a CVX because their correlation is 0.55 if we check the data the correlation between itself would be one and if we have the correlation positive it means they will have the positive effect on each other.
Cross correlation before COVID
RIBM
RBOA
RTSN
RCVX
RIBM
1
RBOA
0.492203
1
RTSN
0.157764
0.115817
1
RCVX
0.405355
0.494008
0.231738
1
Cross correlation during COVID
RIBM
RBOA
RTSN
RCVX
RIBM
1
RBOA
0.643222
1
RTSN
0.432095
0.494063
1
RCVX
0.581673
0.684888
0.443563
1
If we analyse the correlation data before COVID and after COVID, the relationship has been affected in a positive way. We can take a look at any company. For example, the corelationship between the TSN and CVX before COVID is 0.23 and after COVID is 0.44.
We can understand it more by taking help from the below chart:
6. PORTFOLIO RETURN
Portfolio is number of shares that we are having in our demat account. Portfolio represent various shares of different companies, different sectors which may result in raising the portfolio return or decreasing the portfolio return. It might be possible that the return we are having will be less or low. If we have built up the good portfolio, it might be possible that we have reduced our risk to a certain level which can be seen from our data that the return we are getting from an individual companies is approximately and average of 10% but when we are focusing on a portfolio return it is coming after 12.52% which means the portfolio has decreased increased over return percentage. We have taken equal weights to each company.
We have calculated the portfolio return by the formula stated below:
= 10.94% * 25% + 12.60% * 25% + 7.61% *25% + 8.92% * 25%
= 12.52%
7. Begin comparing, the return of individual securities and we can analyze that Bank of America has the largest return from the other companies’ search as IBM, TSM, and CVX. In the entire period if we talk about the pre-COVID. IBM has the maximum return that was giving which is 39.09% among the other companies find if we compare it after COVID, CVX company was giving the highest return ever. It may be because of the energy sector company. the sector of energy will not affect much by COVID. Because it was the crucial sector that can't be affected in any of the circumstances but when we talk about the crisis which was very affected by COVID was TSN. the return has fallen down from 39.59% to 4.46% which is a very huge downfall.
If we have a look over the portfolio return the entire portfolio return whether it is in case of COVID or after the COVID. Our return remains at 12.52% and if we segregate the return into 2 parts that is the before COVID and after COVID. Before COVID, the return was 26.66%. However, after COVID, the average return has drastically increased due to the increase in the return for the energy sector company that is TVX because it has increased itself from 6% to 88%.
Entire
Before COVID
During COVID
IBM
10.94
38.09
16.61
BOA
12.6
28.58
34.44
TSN
7.61
33.59
4.46
CVX
8.92
6.39
88.19
Portfolio
12.52
26.66
35.92
8. Beta
It means how much a stock fluctuates in comparison to other stock. Beta can be found using the formula
To calculate the beta, there are various methods but we have taken the covariance method. For that, we have taken the covariance between the company and SP 500.
COMPANY
IBM
BOA
TSN
CVX
PORTFOLIO
Beta whole period
0.84
1.23
0.64
1.07
0.95
Beta before COVID
1.02
1.17
0.52
0.89
0.90
Beta in COVID
0.81
1.24
0.66
1.09
0.95
9 Conclusions
There are various benefits on forming the portfolio which are as follows:
· Risk is reduced since we have different areas of stocks and all areas do not fall as there would be always some profile who increases.
· Align With our financial goals since we can gain some diversification and do some high risk ones which may have higher returns.
· Higher growth opportunity due to the fact some sectors have some periods of peak for example during this COVID 19 we gain higher rate of returns in pharm companies
Yes we have CVX which provides us with good returns which was not before COVID but provided very high returns after COVID due to high demand of energy during lockdown. The energy sector was the least affected sector of all sector as it comes in the most crucial sector for living.
The worst stock is TSN which does not increase much overall since it was affected due to workers shortage due to lockdown and machines cannot be used which affected the company stocks. As COVID was about the contamination, the people boycott to eat the outside food which affects the whole sector.
Yes, we have the IT sector stock with us which was not much affected due to the pandemic i.e., IBM. There is not much affect on returns an risk.
References:
1. IBM - Wikipedia
2. Bank of America - Wikipedia
3. Tyson Foods - Wikipedia
4. Chevron Corporation -...