Fnce

XLI which is industrial sectors, The Industrial sector is primarily comprised of companies that produce goods used in construction and manufacturing. Some of the key subsectors include aerospace and defense, construction and engineering, building products and industrial conglomerates. The first ten holding companies in this sector are General Electric Co, United Technologies Corp, Boeing Co, 3M Co, Union Pacific Corp, United Parcel service Inc., Honeywell Intl Inc., Caterpillar Inc., Emerson Electric Co, and Danaher Corp. On Nov 28th 2013, the estimate weight in the XLI in the S&P stock index 500 is 10.88%.

In general, the relationship between the mean (return) and standard deviation (risk) is direct. For example, if mean goes up, standard deviation goes up as well. Following Risk and Return graph illustrates different interpretation. Firstly, the trend line explains the position of overall portfolio. In this case, the trend line is the best way to describe the relationship of mean and standard deviation. The trend line is going upwards which indicates that the relationship between return and risk is positive. Secondly, if each stock of the company is evaluated then the whole concept of direct relationship between risk and return doesn’t apply. For example, Honeywell Intl Inc. has the highest return of 0.5704% while it has the moderate risk of 3.998%. 3M Co. have the moderate return of 0.3792% and shows the lowest risk from all, which is 3.1166%. And General Electric Co has the lowest return of 0.3552%. In terms of risks, General Electric Co has the highest standard deviation of 5.31% which represents the highest risk. Risk adverse investor, would choose the stock with high return and low risk, and from XLI sector, Either Honeywell Intl Inc. or 3M Co. would be optimal for him/her.

Moving on to the correlation coefficient of the top ten companies for the past ONE year, following correlation matrix shows that the correlation between Honeywell Intl...