Financial Valuation

Financial Valuation

Risk-Return Project 

Exhibit 1 shows two different sets of rankings between 10 individual stocks. One set of rankings is based on STD and the other is ranked using the Beta. Both show levels of risk using different measurements. When we compare the rankings based on the individual stocks’ Beta versus the individual stocks’ Standard Deviation, we find that the measures of risk are very similar. The Standard Deviation of the stocks explains the deviation of the price from the mean of all the stocks analyzed. The Beta measures risk compared to the market portfolio. The market portfolio has a Beta of 1. If the individual stock has a Beta of less than one then we know the price of that stock is less volatile than the market. If the Beta is more than 1 then we realize that the price of the individual stock is more volatile than the market portfolio.

Exhibit 2 and Exhibit 3 are graphs that compare the STD and Beta versus the individual stocks’ expected returns. Generally, we would use the variable that gives us the most linear relationship. Based on these two graphs the Beta gives us a more linear relationship than the STD. Therefore, we would use Beta to analyze the risk.

Exhibit 4 Next the aforementioned stocks were placed in 11 portfolios. Portfolio 1 contains 1 stock and portfolio 2 contains 2 stocks and so on until we get to P11 containing 11 stocks. Just as above, I ranked the portfolios based on their STD and Beta. The STD ranking does not show much fluctuation. The Beta shows some order movement in the chart.

Exhibit 5 and 6 show the rankings of STD and Beta on an XY graph. While the STD is more linear when graphing the portfolios, the Beta shows an even more linear relationship. This linear relationship tells us that Beta is a more appropriate way to measure risk of a portfolio. The Standard Deviation of the fund measures its volatility compared to its average return over a short period of time. The Beta however...