Financial Markets: Portfolio Construction, Risk, and Return Analysis

This assignment focuses on analyzing investment risk and return within financial markets, specifically using stocks from the S&P 500 index. It involves calculating expected returns, standard deviations, and correlations for selected stocks like Amazon, Berkshire Hathaway, and Johnson & Johnson. The analysis extends to constructing and evaluating different portfolio strategies, including equally weighted, market value-weighted, and momentum-based portfolios. The assignment also covers calculating monthly and annualized excess returns, and Sharpe ratios. Ultimately, the goal is to understand the trade-offs between risk and return in portfolio management and to visually represent investment alternatives through risk-return graphs. This document is available on Desklib, a platform offering study tools and resources for students.

Running head: FINANCIAL MARKET AND INSTITUTES
Financial Market and Institutes
Name of the Student:
Name of the University:
Author’s Note:

1FINANCIAL MARKETS AND INSTITUTES
Table of Contents
In Response to Question 1...............................................................................................................2
In Response to Question 2...............................................................................................................2
In Response to Question 3...............................................................................................................4
In Response to Question 4...............................................................................................................4
In Response to Question 5...............................................................................................................4
In Response to Question 6...............................................................................................................5
In Response to Question 7...............................................................................................................5
In Response to Question 8...............................................................................................................5
Bibliography....................................................................................................................................8

2FINANCIAL MARKETS AND INSTITUTES
In Response to Question 1
The five stocks selected from the current constituent of S&P 500 Index was Amazon
Incorporation, Berkshire Hathaway, Broadridge Financial Solutions, Johnson & Johnson, and
McDonalds. The five stocks are the constituent of S&P 500 Index.
In Response to Question 2
The analyst expectation price and the consensus was calculated based on Index value at the
starting period of investment and the ending value of the investment as per the return. The
expected return generated from each of the stock is calculated based on return generated from
each of the stock or asset class respectively.

3FINANCIAL MARKETS AND INSTITUTES
Date Berkshire Hathaway Index Amazon. Inc Index Johnson &Johnson Index Broadridge Financial Solutions Index Mc Donalds Corporation Index
1 1 1 1 1
1/1/2016 -1.72% 0.98 -13.15% 0.87 1.67% 1.02 0.26% 1.00 4.77% 1.05
2/1/2016 3.39% 1.02 -5.87% 0.82 0.74% 1.02 4.80% 1.05 -5.32% 0.99
3/1/2016 5.75% 1.07 7.44% 0.88 3.59% 1.06 5.67% 1.11 8.06% 1.07
4/1/2016 2.54% 1.10 11.11% 0.98 3.59% 1.10 1.43% 1.13 0.64% 1.08
5/1/2016 -3.40% 1.06 9.58% 1.07 0.54% 1.11 7.27% 1.21 -3.50% 1.04
6/1/2016 3.02% 1.10 -0.99% 1.06 8.41% 1.20 1.57% 1.23 -1.41% 1.03
7/1/2016 -0.36% 1.09 6.04% 1.12 3.24% 1.24 4.29% 1.28 -1.52% 1.01
8/1/2016 4.31% 1.14 1.36% 1.14 -4.70% 1.18 2.39% 1.31 -1.69% 0.99
9/1/2016 -4.00% 1.09 8.86% 1.24 -0.35% 1.17 -2.18% 1.28 0.52% 1.00
10/1/2016 -0.12% 1.09 -5.67% 1.17 -1.81% 1.15 -4.17% 1.23 -2.42% 0.97
11/1/2016 9.11% 1.19 -4.97% 1.11 -4.04% 1.11 0.12% 1.23 5.95% 1.03
12/1/2016 3.52% 1.23 2.41% 1.14 4.23% 1.15 2.41% 1.26 2.85% 1.06
1/1/2017 0.71% 1.24 7.13% 1.22 -1.70% 1.13 0.85% 1.27 0.70% 1.07
2/1/2017 4.44% 1.30 2.62% 1.25 7.91% 1.22 4.21% 1.32 4.14% 1.11
3/1/2017 -2.77% 1.26 4.91% 1.31 2.59% 1.26 -1.99% 1.30 2.28% 1.14
4/1/2017 -0.88% 1.25 4.34% 1.37 -0.87% 1.24 3.43% 1.34 7.96% 1.23
5/1/2017 0.04% 1.25 7.53% 1.47 3.87% 1.29 8.51% 1.46 7.83% 1.33
6/1/2017 2.47% 1.28 -2.68% 1.43 3.83% 1.34 -0.43% 1.45 1.50% 1.35
7/1/2017 3.31% 1.33 2.04% 1.46 0.33% 1.35 0.84% 1.46 1.93% 1.37
8/1/2017 3.54% 1.37 -0.73% 1.45 -0.26% 1.34 2.99% 1.51 3.11% 1.41
9/1/2017 1.19% 1.39 -1.96% 1.42 -1.16% 1.33 3.44% 1.56 -1.48% 1.39
10/1/2017 1.97% 1.42 14.97% 1.64 7.23% 1.42 6.80% 1.66 6.53% 1.49
11/1/2017 3.25% 1.46 6.47% 1.74 -0.06% 1.42 3.19% 1.72 3.03% 1.53
12/1/2017 2.70% 1.50 -0.62% 1.73 0.89% 1.43 2.17% 1.75 0.68% 1.54
1/1/2018 8.15% 1.62 24.06% 2.15 -1.10% 1.42 6.87% 1.87 -0.57% 1.53
2/1/2018 -3.35% 1.57 4.24% 2.24 -6.01% 1.33 4.12% 1.95 -7.83% 1.41
3/1/2018 -3.73% 1.51 -4.30% 2.14 -0.70% 1.32 9.27% 2.13 -0.24% 1.41
4/1/2018 -2.88% 1.47 8.21% 2.32 -1.30% 1.31 -1.93% 2.09 7.07% 1.51
5/1/2018 -1.14% 1.45 4.05% 2.41 -5.43% 1.24 7.69% 2.25 -4.44% 1.44
6/1/2018 -2.55% 1.41 4.31% 2.51 2.19% 1.26 -0.30% 2.24 -2.07% 1.41
7/1/2018 6.01% 1.50 4.57% 2.63 9.21% 1.38 -1.53% 2.21 1.18% 1.43
8/1/2018 5.48% 1.58 13.24% 2.98 1.64% 1.40 19.61% 2.64 2.98% 1.47
9/1/2018 2.58% 1.62 -0.48% 2.96 3.27% 1.45 -2.36% 2.58 3.76% 1.53
10/1/2018 -4.12% 1.55 -20.22% 2.36 1.32% 1.47 -11.06% 2.30 5.74% 1.61
11/1/2018 2.72% 1.60 -5.09% 2.24 1.43% 1.49 -14.32% 1.97 3.29% 1.67

4FINANCIAL MARKETS AND INSTITUTES
In Response to Question 3
The current market value of the stock was taken for each of the stock and the respective value
was recorded for the same. The market value for the stocks was taken based on the outstanding
shares of the stock and the respective share price of the stock.
Particulars Share Price Outstanding Shares Market Value
Berkshire Hathaway 132.039993 2,000,000 264079986
Amazon. Inc 675.890015 501,000,000 3.38621E+11
Johnson & Johnson 95.399261 2,728,000 260249184
Broadridge Financial Solutions 50.932392 116,751,000 5946407698
Mc Donald’s Corporation 109.64064 780,000,000 85519699200
In Response to Question 4
The monthly returns for the stock was calculated based on the monthly data taken and the return
generated from the same in the given time period.
In Response to Question 5
The correlation of each pair of the five stocks was calculated based on the correlation matrix
provided below:
Correlation Matrix
Berkshire
Hathaway Amazon. Inc
Johnson
&Johnson
Broadridge Financial
Solutions
Mc Donalds
Corporation
Berkshire Hathaway 1
0.21873635
8 0.21429076 0.18557932 0.190706073
Amazon. Inc 0.218736358 1 0.078975647 0.536112711 -0.020799729
Johnson &Johnson 0.21429076
0.07897564
7 1 -0.033471225 0.340965463
Broadridge Financial
Solutions 0.18557932
0.53611271
1 -0.033471225 1 -0.12194137
Mc Donalds Corporation 0.190706073
-
0.02079972
9 0.340965463 -0.12194137 1

5FINANCIAL MARKETS AND INSTITUTES
In Response to Question 6
The annual standard deviation was calculated for the stock using the monthly standard deviation
or the volatility of returns of the following stocks taken for the analysis:
Particulars Annual Return Annual S.D
Berkshire Hathaway 18.24% 12.02%
Amazon. Inc 36.87% 27.47%
Johnson & Johnson 15.48% 12.46%
Broadridge Financial Solutions 28.51% 19.69%
Mc Donald’s Corporation 20.19% 13.40%
Equally Weighted Portfolio 23.86% 17.01%
Value Weighted Portfolio 33% 24.55%
Momentum Portfolio 24.35% 17.38%
In Response to Question 7
The expected return and the standard deviation for the portfolio was calculated using the five
Stocks taken and the respective risk and return taken from the same.
In Response to Question 8
a) Equally Weighted Portfolio:
Particulars
Berkshire
Hathaway
Amazon.
Inc
Johnson
&Johnson
Broadridge Financial
Solutions
Mc Donald’s
Corporation
Monthly Return 1.41% 2.65% 1.21% 2.11% 1.54%
Annualized Return 18.24% 36.87% 15.48% 28.51% 20.19%
Holding Period Return 18.24% 36.87% 15.48% 28.51% 20.19%
Portfolio Weight 20% 20% 20% 20% 20%
Portfolio Return 3.65% 7.37% 3.10% 5.70% 4.04%
Monthly Standard
Deviation 3.47% 7.93% 3.60% 5.68% 3.87%
Annualized Standard 12.02% 27.47% 12.46% 19.69% 13.40%

6FINANCIAL MARKETS AND INSTITUTES
Deviation
Portfolio Standard
Deviation 2% 5% 2% 4% 3%
b) Market Value Weighted Portfolio
Particulars
Berkshire
Hathaway Amazon. Inc
Johnson
&Johnson
Broadridge Financial
Solutions
Mc Donald’s
Corporation
EW Return 1.41% 2.65% 1.21% 2.11% 1.54%
Annual Return 18.24% 36.87% 15.48% 28.51% 20.19%
Market Cap 264079986
3.38621E+1
1 260249184 5946407698 85519699200
Weights 0.06% 78.64% 0.06% 1.38% 19.86%
Weight*Return 0.01% 28.99% 0.01% 0.39% 4.01%
Monthly Standard
Deviation 3.47% 7.93% 3.60% 5.68% 3.87%
Annualized Standard
Deviation 12.02% 27.47% 12.46% 19.69% 13.40%
Portfolio Standard
Deviation 0.01% 21.60% 0.01% 0.27% 2.66%
c) Momentum Portfolio
Particulars
Berkshire
Hathaway Amazon. Inc
Johnson
&Johnson
Broadridge Financial
Solutions
Mc Donald’s
Corporation
Monthly Return 2017 1.41% 2.65% 1.21% 2.11% 1.54%
Annualized Return 2017 18.24% 36.87% 15.48% 28.51% 20.19%
Momentum Portfolio 15.29% 30.91% 12.97% 23.90% 16.92%
Weight*Return 2.79% 11.40% 2.01% 6.81% 3.42%
Holding Period Return 18.24% 36.87% 15.48% 28.51% 20.19%
Portfolio Weight 19.09% 22.10% 18.65% 20.75% 19.41%
Portfolio Return 3.48% 8.15% 2.89% 5.92% 3.92%
Monthly Standard
Deviation 3.47% 7.93% 3.60% 5.68% 3.87%
Annualized Standard
Deviation 12.02% 27.47% 12.46% 19.69% 13.40%
Portfolio Standard
Deviation 2.30% 6.07% 2.32% 4.09% 2.60%

7FINANCIAL MARKETS AND INSTITUTES
d) Risk and Return Graph
10.00% 15.00% 20.00% 25.00% 30.00% 35.00% 40.00%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
Berkshire
Hathaway
Amazon. Inc
Johnson & Johnson
Broadridge
Financial Solutions
Mc Donalds
Corporation
Equally Weighted
Portfolio
Value Weighted
PorftolioMomentum
Portfolio
Risk and Return

8FINANCIAL MARKETS AND INSTITUTES
Bibliography
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regulation, capital structure, and the low-risk anomaly. American Economic Review, 105(5),
pp.315-20.
Gray, P., 2014. Stock weighting and nontrading bias in estimated portfolio returns. Accounting
& Finance, 54(2), pp.467-503.
Khan, M.T.I., Tan, S.H. and Chong, L.L., 2017. Perception of past portfolio returns, optimism
and financial decisions. Review of Behavioral Finance, 9(1), pp.79-98.
Rokade, A., Malhotra, A. and Wanchoo, A., 2016, May. Enhancing portfolio returns by
identifying high growth companies in Indian stock market using artificial intelligence. In Recent
Trends in Electronics, Information & Communication Technology (RTEICT), IEEE
International Conference on (pp. 262-266). IEEE.