Portfoilo Analysis

Based on the six stocks we chose in Project 1: 3M (MMM), Disney (DIS), Johnson & Johnson (JNJ), Verizon (VZ), Coca-Cola (KO) and Hewlett-Packard (HPQ), we created an optimal risky portfolio. Using the weights suggested for the maximum return from project 1, we performed a regression output and were able to calculate the standard deviation, alpha, and beta of this portfolio. As shown in the regression table below, you can see that the standard deviation of our portfolio is 0.5151%. The beta is 0.00324, which suggests that the portfolio performed about average for its’ level of risk. The alpha is -0.0002645, which suggests that the portfolio will perform inversely of the market. These values reinforce our assumption of poor performance even when using the optimal risky weights for each of the six stocks.

As you can see, our portfolio yielded a return of -0.00986% over the last twelve months. When comparing our portfolio to the average daily returns of the S&P 500, we found that our optimal risky portfolio could not outperform the index, which averaged a return of 0.02%.

When calculating the Sharpe Ratio of the portfolio, we found the value to be -0.17997, which suggests that the portfolio will be outperformed by an investment in a riskless asset like a Treasury Bond.

Taking this knowledge and analysis into consideration, it is obvious to assume that no investor looking to increase their wealth would or should invest in this portfolio, regardless of the investment time frame or their required return. However, if one were to invest, it would most likely be a younger investor who is willing to take on risks as opposed to an older, more conservative investor. The small standard deviation suggests that there is little deviation from the mean so the stocks are not extremely volatile which could provide some comfort to investors.

Throughout the past year, there have been many spikes and drops in the economy due to the recession of 2008 and the financial crisis in...