Research Paper on "Optimization of Stocks Investment Diversifications Strategy to Maximize Returns and Minimize Risks"

Research Paper 10 pages (2308 words) Sources: 1+ Style: Let the writer choose

[EXCERPT] . . . .

Thus, the study collects 8-year data of the diversified stock portfolios between 2007 and 2014 from the DataStream. The rate of 1 year Treasury bill is collected from the government database. The rate of the 1 year Treasury bill is 4.7% yearly.

The study uses the statistical analytical tool such as and Descriptive Statistics for the analysis. The stock returns of each stock are collected to make up the chosen portfolio as revealed in the table below:

Average Annual Total Returns

Avg Ann'l Ret

2,9

55,1

32,5

11,3

85,0

149,2

35,0

84,3

79,9

62,9

59,8

Std Dev

2,5

30,4

4,2

4,6

10,3

36,8

9,3

12,2

16,0

12,6

11,8

Average Standard Deviation

13,9

The paper also uses the Excel to calculate the percentage of the annual expected returns using the Excel function. The expected returns with corresponding standard deviation assist in constructing our portfolio. Based on the historical data above, our expected returns in percentage shows that thet have 50% of producing 59.8% profits, and 50% of producing 13.9% loss with the calculation as follows:

Expected Return: 0.5*0.598+0.5*-0.139.

Expected Return: 22.95%.

Based on the historical data, the 22.95% is the expected average annual return.

Covariance Matrix

1 356,8834

130,2683

313,8863

526,8211

281,5500

MKSI

3,0679

240,0776

11,4894

23,6223

60,7087

130,2683

86,3558

92,5244

80,5050

107,7547

OME

6,5477

353,3888

9,3319

47,8380

54,5238

313,8863

92,5244

148,7793

148,7898

123,6058

PL

25,8113

401,1643

(0,8754)

49,0418

78,5333

526,8211

80,5050

148,7898

254,9045

150,5811

SNDK

11,0862

348,9038

4,8655

33,3907

75,4048

281,5500

107,7547

123,6058

150,5811

158,5557

Descriptive Statistics

AMZG-A

AAPL-O

T

F-N

XOM-N

IBM-N

WFC-N

LH-N

MCD

WMT-N

Mean

2,860375

55,13538

32,52125

11,30625

84,97375

149,17

34,95125

84,32

79,94625

Mean

62,94125

Standard Error

0,937384

11,4908

1,595925

1,75054

3,887601

13,92266

3,512341

4,610225

6,034479

Standard Error

4,759287

Median

1,98

51,9685

31,915

11,855

85,655

153,6

30,59

86,295

82,485

Median

57,91

Mode

#N/A

#N/A

#N/A

#N/A

#N/A

#N/A

#N/A

#N/A

#N/A

Mode

#N/A

Standard Deviation

2,651322

32,50088

4,513958

4,951274

10,9958

39,37923

9,9344

13,03969

17,06808

Standard Deviation

13,4613

Sample Variance

7,02951

1056,307

20,37581

24,51511

120,9075

1550,724

98,6923

170,0334

291,3195

Sample Variance

Source: DataStream (2015)

4. Method Used

The method is by using the descriptive statistics to summarize the data in a manageable form. The paper also uses the covariance to test the degree the assets move. A positive covariance of the asset returns moves together while the negative covariance moves in opposite direction that is moving inversely.

Descriptive Statistics

The descriptive statistics of the data provide the Mean value of the 8-year data of all the stocks. Moreover, the paper provides Standard Deviation of the data to reveal the level of the annual volatility of the yearly return. The average total annual return assists in developing covariance matrix to reveal the method the annual return move to one another in the last 10 years. Moreover, the paper calculates the correlation matrix.

Results

The results reveal that 22.95% is the expected average annual return for our portfolio. Thus, paper divides our hypothetical $700,000 to purchase the number of stocks as being revealed below:

Average Annual Total Returns

Total Annual Return

Year

AMZG-A

AAPL-O

T

F-N

XOM-N

IBM-N

WFC-N

LH-N

MCD

WMT-N

Avgas Ann'l Ret

2,9

55,1

32,5

11,3

85

149,2

35

84,3

79,9

62,9

No of Shares Bought

1999

2000

Total Price for the Stock

5797,1

49534,9

42250

22600

105230

126820

42000

113805

115855

76109

700001

Returns in Dollars

1736,231

14835,7

12653,88

6768,7

31516,39

37982,59

12579

34084,6

34698,57

22794,65

209650,3

The results are presented in graphical form as revealed below:

The results reveal that our investors will record 22.95% annual returns from $700,000 investment based on diversification strategy. Thus, our investor will record $209,650 annual return from $700,000 Million investment.

Sensitivity Analysis

The study carries out the sensitivity analysis to examine whether the investors will realize profits from the portfolios if the investment returns decrease to 15% instead of 22.95%.

Average Annual Total Returns

Total Annual Return

Year

AMZG-A

AAPL-O

T

F-N

XOM-N

IBM-N

WFC-N

LH-N

MCD

WMT-N

Avg Ann'l Ret

2,9

55,1

32,5

11,3

85

149,2

35

84,3

79,9

62,9

No of Shares Bought

1999

2000

Total Price for the Stock

$5,797,1

49534,9

42250

22600

105230

126820

42000

113805

115855

76109

700001

Returns in Dollars

$869,565

$7,430,235

6337,5

15784,5

19023

17070,75

17378,25

11416,35

105000,2

The result of the sensitivity analysis reveals that the investor will realize appropriately $105,000 from $700,000 stock investment if the average annual returns decline to 15%. Thus, the overall returns for $1 Million investment will be $119,100. The study has been able to achieve its goal and objective by revealing that the diversification of investment portfolios can assist investors to earn superior returns from their investment. Moreover, the diversification can assist investors to minimize risks and maximize investment returns.

6. Conclusions

This research explains the benefit of diversification which assists prospective investors… READ MORE

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