This document discusses financial management and portfolio construction using various stocks for investment. It includes analysis of monthly data, calculation of mean variance and standard deviation, correlation coefficient, weights in portfolio, and portfolio's mean monthly return, variance, and standard deviation.
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Running head: FINANCIAL MANAGEMENT Financial Management Name of the Student: Name of the University: Author’s Note:
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1FINANCIAL MANAGEMENT Financial Management Portfolio construction will be done with the help of the various stocks that are considered best for the purpose of investment. The three publically traded stocks that were considered for the purpose of investment will be the General Mills, Johnson & Johnson and Consolidated Edison. The monthly data for the stocks from the period of 30thof June 2009 to 30thof June 2019. The monthly rate of return including the standard deviation and variance would be calculated with the help of the excel functions. The above three stocks selected operates in a different sector whereby the operations of the company is diversified and belongs to different industry. The criteria for selecting the security was based on large cap stocks which had a substantial market share and the industry in which the company operates is expected to outperform the others. Stocks Selected General Mills:The stock has around $30 billion of market cap where the company sells packaged foods. The company has been a founder in the same industry with a long-track record of the company in rewarding the investors or the stakeholders of the company.
2FINANCIAL MANAGEMENT Nike:The shares of Nike Company were up more than 20% year than the past year and the reason behind the same has been due to the positive growth in the athletic footwear and sportsman giant that the company delivers.The high global demand and the risk mitigation plan undertaken by the company in correspondence to the forex risk faced by the company will be some of the key reasons that the stock is selected. Consolidated Edison:Con Ed is one of the largest investor owned Energy Company in the United States with an annual revenue of $12 billion and has around $48 billion of assets in the financial statement of the company. The company with its wide asset base also has a strong market share in the energy industry making the company a dominant player with consistent growth in the financials of the company. The increasing demand for the energy in US has been the key reason for selecting the company.
3FINANCIAL MANAGEMENT Monthly Data The monthly data for the stocks from the period of 30thof June 2009 to 30thof June 2019. The monthly rate of return including the standard deviation and variance would be calculated with the help of the excel functions. Mean Variance and Standard Deviation Monthly Mean0.58%0.77%0.76% Monthly Variance0.20%0.15%0.18% Monthly Standard Dev.4.46%3.94%4.21% Annual Mean6.98%9.23%9.10% Annual Variance2.38%1.86%2.12% Annual Standard Dev.15.4%13.6%14.6% Return/Risk0.450.680.62 Correlation Coefficient CorrelationMatrix General Mills Johnso nEdison General Mills10.490.34 Johnson & Johnson0.4910.43 Consolidated Edison0.340.431 Weights in Portfolio The weight that would be given to Johnson & Johnson, Consolidated Edison would be 40% weight respectively. On the other hand, side 20% weight would be given to General Mills whereby the weights to each of the stock has been given on a risk return basis. Portfolio’s Mean Monthly Return, Variance, and Standard Deviation. PortfolioPerspective TimeGeneralMillsJohnson&JohnsonConsolidatedEdison
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7FINANCIAL MANAGEMENT 11/1/2018-1.59%-4.86%-1.94% 12/1/20182.82%1.25%0.62% 1/1/20191.21%1.07%2.47% 2/1/20191.96%0.92%1.14% 3/1/2019-0.11%0.40%0.64% 4/1/2019-0.79%-2.85%0.06% 5/1/20191.25%2.48%0.64% 6/1/20190.00%0.00%0.00% Portfolio Normal Distribution Scenario The monthly average return generated by the portfolio will be taken as x and the benchmark return would be taken as mean or u and the standard deviation of the portfolio would be taken as derived above. The mean return of portfolio would be around 8.73%, the benchmark return would be taken as 11.75% and the standard deviation of the portfolio would be taken as 8.56%. NormalDistributionLoss Portfolio Mean Return (x)8.73% Benchmark Return (u)11.75% Standard Deviation8.56% Value - 0.3531973 7 Critical Value @10% (90% Probability)1.645 Loss - 1.9981973 7 If 100,000 is invested then the annual 10% loss would be around - 1998.1973 7 If 100,000 is invested then the daily 10% loss would be around - 124.88733 5
8FINANCIAL MANAGEMENT Change in Weights The random change in the weights of the stock has been done in a random basis whereby the different values of the stock would be taken into consideration for the purpose of valuation or determining the appropriate or the optimal weights. PortfolioWeights SeriesGeneralMillsJohnson&JohnsonConsolidatedInc.Total(%) 145.71%41.85%12.44%100.00% 229.71%40.24%30.04%100.00% 35.62%48.09%46.30%100.00% 460.92%9.71%29.37%100.00% 522.62%38.56%38.82%100.00% 615.37%58.82%25.82%100.00% 72.29%95.77%1.93%100.00% 851.98%29.23%18.78%100.00% 921.98%28.93%49.08%100.00% 1043.12%55.11%1.77%100.00% 1139.57%45.95%14.48%100.00% 1236.75%35.13%28.12%100.00% 1342.60%32.49%24.91%100.00% 1443.94%29.98%26.08%100.00% 1527.20%47.86%24.93%100.00% 1638.50%34.58%26.92%100.00% 1739.79%54.34%5.88%100.00% 1840.61%42.80%16.59%100.00% 1931.65%61.95%6.40%100.00% 2014.86%68.07%17.06%100.00% 2143.89%19.68%36.43%100.00% 2227.59%20.42%51.99%100.00% 2325.58%16.91%57.52%100.00% 242.03%51.40%46.57%100.00% 2512.59%43.28%44.13%100.00% 2648.16%12.05%39.79%100.00% 276.57%35.74%57.70%100.00% 2844.89%10.84%44.27%100.00% 2913.61%56.62%29.77%100.00% 3032.59%27.90%39.51%100.00% 315.62%37.96%56.42%100.00%
14FINANCIAL MANAGEMENT Bibliography Bender, J., & Wang, T. (2016). Can the whole be more than the sum of the parts? Bottom-up versustop-downmultifactorportfolioconstruction.Bottom-UpVersusTop-Down MultiFactor Portfolio Construction (February 6, 2016). Bruno, S., Chincarini, L. B., & Ohara, F. (2018). Portfolio construction and crowding.Journal of Empirical Finance,47, 190-206 Chakravorty, G., Awasthi, A., Srivastava, S., Gupta, S., & Singhal, M. (2019). Active Risk Budgeting: A Portfolio Construction Methodology for Futures Strategies.Mansi, Active Risk Budgeting: A Portfolio Construction Methodology for Futures Strategies (February 2019). Henriksson, R., Livnat, J., Pfeifer, P., & Stumpp, M. (2019). Integrating ESG in Portfolio Construction.The Journal of Portfolio Management,45(4), 67-81. How to make 3 random numbers that sum to 1 - MATLAB Answers - MATLAB Central. (2019).Mathworks.com.Retrieved29June2019,from https://www.mathworks.com/matlabcentral/answers/358920-how-to-make-3-random- numbers-that-sum-to-1 Leo Sun, a. (2019).3 Top Large-Cap Stocks to Buy in May -- The Motley Fool.The Motley Fool. Retrieved 29 June 2019, from https://www.fool.com/investing/2019/05/13/3-top-large- cap-stocks-to-buy-in-may.aspx Padma, A., & Rambabu, G. (2017). Optimal Portfolio Construction by Using Sharpe Single Index Model.Sumedha Journal of Management,6(4), 57-65. Post, T., Karabati, S., & Arvanitis, S. (2017). Portfolio Construction Based on Stochastic Dominance and Empirical Likelihood.Available at SSRN 2827305.
15FINANCIAL MANAGEMENT Valle, C. A., Roman, D., & Mitra, G. (2017). Novel approaches for portfolio construction using second order stochastic dominance.Computational Management Science,14(2), 257-280. YahooisnowpartofOath.(2019).Finance.yahoo.com.Retrieved29June2019,from https://finance.yahoo.com/quote/%5EGSPC/history? period1=1246213800&period2=1561746600&interval=1mo&filter=history&frequency= 1mo