Financial Modelling Project Report: Investment Analysis

This report presents an analysis of a financial modelling project involving 150 stocks sorted into five portfolios based on market capitalization. The analysis focuses on the average return and beta of each portfolio. The report examines the expected return pattern across size quintiles, finding that smaller capitalization companies offer higher returns due to factors like fewer outstanding shares and lower retained earnings. The portfolio returns generally show the expected pattern, with smaller companies exhibiting higher returns. Variations in portfolio beta are found to correlate with variations in returns, indicating that beta reflects the portfolio's risk and return characteristics. The conclusion highlights the role of size as a crucial factor affecting stock prices and suggests that a diversified portfolio across different industries can improve stock returns. The report also discusses the differences in results compared to Fama and French research, which considers various bases for portfolio creation beyond market capitalization.

Running Head: Financial Modelling
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Project Report: Financial Modelling

Financial Modelling
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Contents
Introduction:.....................................................................................................................3
Expectation from return:...................................................................................................3
Pattern expectation:..........................................................................................................3
Beta variation:...................................................................................................................3
Conclusion:.......................................................................................................................3
Difference in results:.........................................................................................................4
References:.......................................................................................................................5

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Introduction:
The report focuses on 150 stocks and 5 portfolios which are consist of 150 stocks.
Return and beta of the portfolios have been considered in the report to identify their impact
over the investment.
Expectation from return:
On the basis of overall return from 5 portfolios, it has been identified that the max
return is from small capitalization companies. It explains that the investment in small cap
companies would offer better returns because of less size quantity of stock and lesser retained
earnings (Chandra, 2017).
Pattern expectation:
On the basis of the given table, it has been recognized that the higher the size of stock
of the company would be, the lesser the average return of the company as the net profit of the
company would be divided into various parts in large cap company in comparison with small
cap companies. It concludes that portfolio return show the expected patters.
Beta variation:
Beta of a portfolio depends on the average return of portfolio. Hence, is there is
variation in the beta of the portfolio, it clearly leads to the conclusion that there is deviation
among the average return of the portfolio (Kock, Heising & Gemünden, 2015).
Conclusion:
There are various factors which affect over the stock price of an individual firm,
industry and the entire market such as rise in fuel price could impact over the stock of motor
vehicle industry. Hence, it explains that if the portfolio consists of cross section of stock then
it improves the stock return as impact over one industry could be compensated by other
industry’s return.

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Difference in results:
There is huge difference in result from Fama and French result because of the fact that
in the research, portfolios have been created on various bases. However, in this case, only
market cap has been considered while evaluating the return.

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References:
Chandra, P. (2017). Investment analysis and portfolio management. McGraw-Hill Education.
Kock, A., Heising, W., & Gemünden, H. G. (2015). How ideation portfolio management
influences front‐end success. Journal of Product Innovation Management, 32(4), 539-
555.