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Investment Analysis Term Paper


The choice of an investment is based on the factors which affect that particular decision. Internally, when choosing an investment, one considers the availability of capital and the market of the chosen investments. Having a direct relation, the higher the capital, the more the investments and consequently the returns. Externally, one considers the regulations that affect a certain market and how he or she adheres to them. Investments being a long-term choice involve a lot of reconnaissance and analysis so that the company does not incur financial losses (Aren& Zengin, 2016). With investments, comes increased use of capital and ultimately more economic participation.

Risk is a threat that accrues to particular investments and if not properly addressed then this will have a detriment effect on the returns reported by that particular company. With an aim of reducing risk, various options ranging from avoiding risk to diversification are adopted (Bruno, Ahmed, Shapiro & Street, 2016). Risk avoidance is a good step when one has not yet advanced resources towards the particular investment (Artus & Muet, 2016).  However, with diversification, risk in an already made investment can be reduced in that increasing assets in a portfolio spreads the deviation among all the assets thus reducing the risk.

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Diversification cuts down on risk effects in a direct relation in that the more the assets the more the risk reduction and vice versa (Schmitt, Sun, Snyder & Shen, 2015). The concept of diversification can be illustrated by Makowitz who expresses it as a strategy that combines assets with returns that are less positively correlated so as to reduce the risk that one may bear (Dhrymes, 2017).Through this combination, diversification is explained. This paper analyzes the investment made in a portfolio of assets in the United States.

Fundamental Analysis
Investment Philosophy
With an initial one million dollars to spend, I choose to invest in shares and funds within different companies within the United States. The Stock Trak programme is used for simulation purposes. It therefore shows what is happening in the real world when investments are involved (Nguyen & Luthar, 2015). The investment is based on the philosophy of diversification where the choice to invest in shares and other funds is aimed at maximizing returns subject to the risk that the company may face. By spreading the investment capital across many assets, the deviation from actual returns is spread across many assets thus helping to reduce it (Anderson, Ward, Shelton, Adkison, Beaudreau, Brenner & Williams, 2017). This risk is measured by standard deviation of the individual assets such that the returns earned are assessed over time. In addition, the whole market risk is computed based on the beta (Lehar, 2005). The beta works by measuring the responsiveness of a particular asset’s return to changes in the whole market (Fernandez, 2015).

Diversification therefore works to reduce this risk. In exercising this, correlation between the returns of the assets is looked at. With this philosophy, assets are combined in such a way that different correlations are the ones combined. Inversely correlated assets are combined in a portfolio and this makes the risk reduce (Giglio, Kelly & Pruitt, 2016). Apart from risk reduction, diversification helps to preserve capital and this works better for future savings. The maturity of assets differs and over an assets’ life one may lose or gain. With capital spread over the assets, loss in one does not mean a loss in another and by this capital is preserved. Diversification works on guaranteeing returns. Within, a loss in one asset does not imply loss in another and this buffers loss (Jaffar, Dewandaru & Masih, 2018). That being said, risk can be reduced through combination of different correlation assets.

Rationale for Asset Allocation
With an aim of diversification, various assets are included in the portfolio. Through effective asset allocation, a balance of risk and reward helps to align goals, tolerance of risk and maximizing investment returns. Effective asset allocation helps to reduce risk while returns are maximized (Selig, 2018). The assets in this portfolio are twenty and include shares from different companies. With a high price for the individual shares, more investments are made on the shares with a high price. Generally, the higher the price the more the expected returns. This is based on holding other factors constant for instance expenses. The more the expenses the less the net returns. Balanced decision making therefore involves considering both returns and expenses. Asset allocation in this case is aimed at maximizing returns and therefore the investment is made in such a way that the net returns are held high (Salm, Hille & Wüstenhagen, 2016).

Minimizing risk, which happens to be a motivation, works hand in hand with cutting down the expenses. A higher net profit is also a consideration for asset allocation (Kwak, Seo & Mason, 2018).Though some assets have less prices, investments are still made in them. This may be due to reputation in that with an aim of maintaining a good relation with the company, then as an investor choice is made for these shares. To maintain good relationship among the key personnel, the investment can also be made with a favor towards a certain company’s shares. Further, support towards the same goal may motivate investments in one another (Abdel-Kader, Dugdale & Taylor, 2018). Asset allocation for this case therefore is based on both qualitative and non-qualitative factors.

From the table above, the performance of individual securities as well as the whole portfolio can be assessed. The choice of individual securities depends on the perceived rate of return such that the higher the price the higher the returns (Sharpe, 1964). Basing on the above analysis, Apple Inc.is well preferred because its returns are the highest. By proportion defined in terms of value of the individual securities, Alphabet Inc. shares give the highest proportion. The value is what the individual asset contributes to the whole market value.

The quantities chosen depend on the prices at which the securities are traded. Rationally, investors will choose the shares with the lowest cost because this will imply a low cost of operations. Low operational cost will cause efficiency and ultimately effectiveness in achieving goals (Fama, 1972).Apart from this, shares trading in a high price will result to more profit if costs are held constant. Businesses operate with a profit motive and any increase in prices will justify an investment in those particular assets (Nakatani, 2018). Preferences by individuals will affect the choice of individual on which securities to invest in (Gormley & Matsa, 2016).The capability of shares giving an ownership stake in the company justifies for interest in these types of securities. In addition to this, risks posed by securities also influence the choice of securities. This risk is measured by the standard deviation from the returns attained. Preference is made towards securities with lower risks and high returns (Zhu, 2018). However, the question of risk depends on the risk profile of the investors. Risk lovers prefer high risk while risk averse ones prefer low risk. The risk neutral investors have no preference for any amount of risk. They therefore are indifferent and consider other factors for investments’ choice (Brink, 2017). The choice of individual securities therefore depends on both qualitative and quantitative factors.

Performance of the Portfolio against the Industry Average Performance
While choosing the price borne by shares as the benchmark, the performance of this portfolio differs slightly with the market performance. The average price of the individual securities greatly differs with the market price offer on average. For the Apple Inc. company, it was traded at 199.50 dollars though the market offered 167.47 dollars. This means that Apple’s shares performed better than the market. For Amazon, having been traded at $1885.65 and the market offered 1667.46 dollars, it performed better than the market as well. Baidu Inc. had the same trend as the 181-dollar price was greater than $172.77.

BP Plc was marked at $41.9 while the market offered $44.90 for the same asset. This implies that the shares performed less than the market. ConocoPhillips company’s shares were sold at 69.79 dollars while the market gave a 65.75-dollarthreshold. Comparatively, this was better performance for this asset. By extension, Cooper Tire performed better than the market. Its share’s price was $33.75 which was better than the $31.72 offered by the market. Chevron Company contradicted this trend by having a 118.95-dollar price which is less than that of the market at $125.24. The shares of the Dunkin brand company its price of 73.68 dollars was less than what the market allowed for trading that is 70.65 dollars. This indicated over performance for this particular asset. The securities of the Darden Restaurant at $111.78 were lower than the market price of $117 and this clearly indicated under performance. Alphabet Inc securities traded at 1133.01 dollars and this was less than the market’s 1197.25 dollars. This also is poor performance compared to the market. The JNJ Company contrasted with this performance as its quoted 119.78 dollars was greater than the market’s 112.5 dollars.

McDonald greatly underperformed as its shares were traded at $28.05 which was less than the market’s 183.59. For the Microsoft Corporation, the shares went for 80.66 dollars though the market gave $112.25 for them. This means that Microsoft’s performance was lower than the markets. Murphy Oil Company sold its shares at 53.02 dollars while the market gave 29.17 dollars for them. This is over performance on a comparative basis. The Target Corporation traded on its shares at 272.32 dollars while the market gave 72.87 dollars. This implied better performance on this particular asset. The Trip Advisor sold its shares at 17.99 dollars which is way below what the market offered considering the 54.15 dollars quote. This is underperformance on this asset.

Tesla Inc. sold its shares at 101.64 dollars while the market gave 309.96 dollars for the same. This is underperformance. The Wendy’s Corporation contradicted this trend by giving an $81.93 price that was higher than the market’s 17.3. The Waste Management’s 135.67 dollars price is higher than the market’s 100.12 dollars indicating better performance. Lastly the Exxon Mobiles’ $190.08 exceeded the market’s $77.74 thereby indicating higher performance. On average the portfolio’s assets performed better than the market except for the few instances highlighted.

The portfolio performed better in the shares of Amazon.com as this were highly priced and yielded higher net profit. The last prices of all the securities were higher than the initial prices of these assets. The combination of both highly performing assets and lowly performing assets compared to the market provided a good diversification mechanism which greatly reduced the risks while maximizing the returns (Arthur, 2018).

Risk and Return Characteristics of the Portfolio
Individual security risk is computed by the standard deviation of the individual asset’s return to their mean returns (Bijl, Kringhaug, Molnár & Sandvik, 2016). The portfolio risk is computed from this.

The overall portfolio risk is 19.57 percent with an expected return of 19.57 percent as well. From the standard deviations no asset had a positive deviation and so internally, there was no risk. Externally however, competition posed by other financial instruments as well as unplanned economic changes may pose risks to the assets (Salem, 2017).This should be addressed and an appropriate risk management framework developed (Giannakis & Papadopoulos, 2016).This simulation done by Stock track has been good for this analysis. In future however, I will use diverse financial instruments other than just shares so that reliable findings are arrived at.

Conclusively, diversification is important because it reduces risks. Asset allocation is based on the risks and the perceived returns of the chosen assets. In order to get better results for the simulation of the assets, more diverse types should be included in the portfolio.

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