You and your significant other have just received a substantial income tax refund and have decided to add one additional stock to your portfolio. Earlier this month you found out that your total portfolio currently has a Beta of 1. 5. This means that your portfolio is 50% more volatile than the market. This is great news if the market goes up (your portfolio will rise 50% more than the average); however, if the market declines, your portfolio will lose 50% more than the market. Using Yahoo Finance (located under Week 6 Supplement) or any other Financial Web-Site, what stock would you recommend to your significant other and why?
Currently the stock portfolio has a beta of 1. 5 which is good if market goes up but is equally risky. In recent times, Stock markets have not performed well with following trends: Two key indices are observed for two different time ranges i. e. 5 years and 2 years. 1. S&P 500 – Standards & Poors – this is considered to be the base data for beta values 2. DJIA – Dow Jones Industrial Average Data ranges for 5 years is taken which will include time period before the current economic recession and will give an idea of how market has trended over the last 5 years
Data for 2 years is taken which is primarily during this current economic recession which will give an idea of how markets are performing Apart from plotting the data on graph, a trend line is also generated which will give an estimate or projection of whether the market is moving upwards or downwards during the time period. It can be seen that market is going down meaning that it is not advised to have risky portfolio in stock market. However a very important aspect of this trend is that it is manifestation of pre-recession period as well and during recession, stocks did go down significantly.
This can be considered if long-term investment is being strategized which is otherwise not recommended because of economic recession. A picture of last 2 years shows a different trend as the market is seen going up from the lows it achieved during the recession. This shows that risk can be taken at least in the short term. RECOMMENDATION Since market in short-term is performing positively and probability of gain is higher, so it is advised that “investment should be made (at least in short-term) with stocks having positive beta”. We will invest in stocks having beta around the same value that we already have in portfolio i. e. Beta of 1. 5
Using Yahoo! Finance Stock Screener available online, stocks were screened for 1. 0 as min value of Beta and 1. 5 as max value. From this, stocks of two companies are selected for investment. 1. California Pizza Kitchen (CPKI) 2. Travel Zoo (TZOO) These both have: – Beta of 1. 5 => This will maintain the beta of current stock portfolio – Higher performance compared to S&P 500 and DJIA which were earlier analyzed to be already trending in positive zone from 2 year analysis. Further it is recommended to allocate 60% of portfolio to TZOO and 40% to CPKI because of better performance of TZOO. Performance graphs of both stocks are shown ahead.