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Strategies & Market Trends : Stocks and Forex Analysis

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From: Kay-Cee	12/17/2016 7:47:59 AM
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Risk and return relationship Table 1 Sage:Daily Mean Return 1.68%; Annual Mean Return 20.13% ;Daily Stdev 6.20%; Annual Stdev 21.49% Tesco:Daily Mean Return -0.59% ; Annual Mean Return -7.05%; Daily Stdev 7.72% ; Annual Stdev 26.75% S&P500:Daily Mean Return 1.02%; Annual Mean Return 12.29%; Daily Stdev 2.97%; Annual Stdev 10.28% Covariance(Sage&Tesco) 0.000796149 Correlation(Sage&Tesco) 0.167314413 This Is a comparison between the food retail industry stock (Tesco) and Information Communication Technology Stock (SAGE Group Plc). I have used S&P 500 as the market portfolio in this scenario. The analysis of the observations are derived from 16/12/2011-16/12/2016 The annual return for Sage outperforms Tesco’s returns by approximately 14% and approximately 7% for S&P500 as seen in table 1. Annual standard deviation for Sage 21.49% is lower than that of Tesco’s and S&P500. Covariance- the Covariance between sage and Tesco are zero which suggests that the returns hardly move in the same direction or inversely. Correlation suggests that there is no relationship between the Returns of Sage and Tesco. CAPM, Beta and Alpha Table 2 SAGE: Rf 0.0025; Rm-Rf 12.04%; Beta 0.839856323; Expected Returns 10.36%; Actual Returns 20.13%; Alpha 9.77% TESCO: Rf 0.0025; Rm-Rf 12.04%; Beta 0.165963028;Expected Returns 2.25%;Actual Returns -7.05%; Alpha -9.30% The Beta values of Sage suggest that Sage stock price is 16% less volatile to any market changes, whereas Tesco beta value suggests there its stock price is 83% less volatile to market any market changes. The Expected Returns using CAPM suggests that Sage outperforms Tesco by approximately 6% The positive alphas value of Sage illustrates that the sage stock is underpriced for its level of risk whereas the Tesco negative alpha suggest that the stock is overpriced for its level of risk. Portfolio combinations Table 3 Sage (0.7) & Tesco (0.3) Portfolio Return=11.98% Portfolio Standard Deviation= 23.07% After combining the two stocks at 70% of Sage and 30% of Tesco from the observations in table 1 and 2 the risk and return relationship relatively remains the same although by combining the two we reduce tesco’s risk by 3%. In this scenario diversification has its benefits on risk and drawback on returns as you can see if we had invested 100% into sage we would have received a 21.49% return and by diversifying we are forgoing that return by 8%. Recommendations. I would recommend a risk averse investor to invest in Sage Group only because diversification in the scenario would not make much of a different as seen in Table 3, the returns will plunge significantly as well for a high risk of diversification is considered. Further considerations would be to include a risk free rate asset of 3% into the portfolio to avoid risk and to be certain about the future.

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