FIN 660 Diversified Risk Stock Portfolio 2026/2027 (4pages)

The portfolio includes stocks from large cap corporations that represent different industries: 1. Caterpillar 2. General Motors 3. Apple 4. IBM 5. Walmart 6. Target 7. Exxon Mobil Stock prices were obtained from Yahoo Finance, and they cover a 5-year period. The annual growth rates were calculated based on September 1st prices. Total 5-year return was calculated using geometric mean. Date Stock prices CAT GM AAPL IBM WMT TGT XOM Sep 01, 2021 196.82 52.23 146.92 137.49 143.17 241.44 57.59 Sep 01, 2020 146.01 29.59 115.07 115.71 137.77 155.18 32.00 Sep 01, 2019 119.83 36.27 55.09 131.75 114.85 103.11 61.68 Sep 01, 2018 140.89 31.25 54.68 130.61 88.99 82.26 71.01 Sep 01, 2017 112.74 36.08 36.77 120.22 72.34 53.14 65.81 Sep 01, 2016 77.69 27.17 26.51 126.83 64.90 59.45 67.52 Date Returns CAT GM AAPL IBM WMT TGT XOM 2020-2021 34.80v.51'.68.82% 3.92U.59y.97 19-2020 21.85% -18.428.88% -12.17.96P.50% -48.12 18-2019 -14.95.06% 0.75% 0.87).06%.35% -13.14 17-2018 24.97% -13.39H.71% 8.64#.02T.80% 7.90 16-2017 45.122.798.70% -5.21.46% -10.61% -2.53% Geometric 5-year returns CAT GM AAPL IBM WMT TGT XOM [email protected]% 1.63.142.35% -3.13% Standalone risk refers to the risk of investing all your money into one single asset. This type of investment is considered very risky since the price of this asset might vary significantly whether up or down and the profits and losses can be significant. The investor is betting everything on the performance of one single stock and it can be a great investment or a terrible one. If we look at the previous table, if the investor had purchased stocks from Exxon Mobil or IBM, his/her investment would have been a very bad one. On the other hand, if the investor had purchased Apple or Target stock, it would have been a great investment. Portfolio risk involves diversifying risk and reducing it by investing in several assets. In this case, the average return of the seven stocks for the 5-year period is 17.60%, which is not as high as the returns from Apple or target, but much higher than the returns from Exxon Mobil and IBM. By diversifying risk, the bad performance of one asset may be offset by the good performance of another asset. The larger the diversification, the lower the risk, and the lower the potential profits. I selected these stocks at random. I wanted to choose stocks from different industries and that is why manufacturers are included (GM and CAT), tech companies (AAPL and IBM), large retailers (WMT and TGT), and finally I searched for a company in the energy sector, and I chose XOM. Diversification implies investing in different stocks and the more unrelated they are to each other, the better. If I invested only in oil companies, their performance would probably be similar to Exxon Mobil’s and the risk wouldn’t have decreased really. The same applies if I had invested only in high tech stocks which carry a lot of risk but potentially very high returns. Diversification is directly related with risk aversion. Investors are said to be risk averse since given the opportunity to buy two assets that yield the same return, they will choose the safest investment. This means that riskier assets must be priced at a lower value in order to attract investors since the higher the potential return, the higher the risk, and the lower the price.