Business Summary and Key Statistics for the Three Stocks - Research Paper Example

? a. Give business summary and key statistics for each. The three stocks that I have chosen for my portfolio are from S&P 500 index. The index currently floats at 1234.83 which dropped from marginally from its previous day close at 1255.19. The three companies include Abbot Laboratories (ABT), Amazon.com Inc. (AMZN) and 3M Co. (MMM). Abbot Laboratories (ABT) belongs from the health care sector and specializes in Drug Manufacturing. The company was founded in 1888. The company is located in United States and possess a workforce of 90,000 fulltime employees. The company practices discovery, development, manufacture, and sale health products globally. Its drug portfolio contains medicine of almost every discovered disease present on this earth. It is a renowned player in the drug industry and a benchmark for its practices as well. Abbot primarily serves retailers, wholesalers, hospitals and health care facilitators. As to date, Abbot’s market capitalization is 84.26B and its Enterprise Value is 93.96B. On December 31st, 2010 Abbot reported revenues of 38.44B and net income of 4.55B. It has 1.56B shares outstanding with a market price of $54.09/share. The quarterly growth of revenue calculated on a year-on-year basis is 13.20%. Amazon.com Inc is a service sector firm and belongs to catalog & mail order industry. The company was founded in 1994 and it is located in United States. The company is works as an online retailer in North America as well as internationally. The company focuses on selection, price and convenience of customers through its website. Moreover, it enables its customers to sell their product through Amazon and gives product developers a platform to market their products. As to date, Amazon.com’s market capitalization is 86.22B and its Enterprise Value is 85.50B. On December 31st, 2010 Amazon.com reported revenues of 43.59B and net income of 870.00 M. It has 454.75M shares outstanding with share price of $189.59/share. The quarterly growth of revenue calculated on a year-on-year basis is 43.90% (Finance) 3M Co. is a conglomerate with subsidiaries operating in Transportation, hygiene products, health care, graphics and technology. It was founded in 1902 and it is located in United States. It has a workforce of 80,057 full time employees. As to date, 3M Co.’s market capitalization is 56.34B and its Enterprise Value is 59.04B. On December 31st, 2010 Amazon.com reported revenues of 29.23B and net income of 4.26B. It has 700.84M shares outstanding with share price of $80.39/share. The quarterly growth of revenue calculated on a year-on-year basis is 9.60%. b. Calculate the average annual return for each stock. = Price at December 1st, 2010 = Price at December 1st, 2011 Abbot Laboratories (ABT): Amazon.com: 3M Co.: c. Which is the riskiest security and which is the least risky based on the SD? (Remember higher the standard deviation the riskier the stock will be). Standard deviation for the stock is calculated by taking stock price from Jan 1st,2011 to Dec 31st,2011. 3M Co.’s standard deviation is 6.61 Amazon.com’s standard deviation is 19.41 Abbot Laboratory’s standard deviation is 2.771 The riskiest security in terms of standard deviation is Amazon.com with 19.41. The stock price ranged from as low as $160.59 to as high as 246.71. The least risky security is Abbot Laboratory with more or less stable prices. The highest in year 2011 was price was $55.61 and lowest price was $45.07. 3M Co.’s stock had standard deviation of 6.61 with highest price of $98.19 and lowest price of 68.63. d. Please comment on the best performing stock and the worst performing stock and provide some justification. The best performing stock for a risk adverse investor would be Abbot Laboratories. The earnings have been stable over the year. However, for a risk taker it would be Amazon.com with quarterly revenue growth year-on-year of 43.90%. The standard deviation is high and the return associated with it is also high. For an investor who has held the stock for the whole year would enjoy a return of 10.58%. The worst performing stock is 3M with an annual return of -3.6%. Its riskiness is high as well and for an investor who has held the stock for the year would be disappointed by the performance. The revenue has grown but it has not been able to show an increase in stock price due to other non-performing business of 3M Co. This is why the stock has not performed to the expectation of the investor. e. Calculate all possible cross-correlations. Briefly discuss the results. The cross-correlation coefficient for the three stocks is -0.644. Cross-correlation is a measure of similarity of two waveforms as a function of a time-lag applied to one of them. The correlation between the stocks is -0.5. This illustrates a negative relation between the stocks. An increase in price of one is accompanied by a negative relation of 0.5 with the other. f. Build a portfolio and allocate weights as you wish. Calculate portfolio return (based on average annual return that you calculated in question b) using the formula: I would build a portfolio which gives high weight to Abbot Laboratories stock as the annual return is high with low volatility. Moreover, I would give a small weight to 3M Co. to avoid nullification of profit earned by Abbot. Lastly, Amazon.com would be given a mediocre weight age because of its volatility. It can increase the profit to a great extent and at the same time can result in declining return as well. The analysis of the past record and the market expectation for the stock provides a basis for bullish trend. Weight for Abbot Laboratories is 60% Weight for Amazon.com is 25% Weight for 3M Co. is 15% Where are the weights to you allocate to each security and are the average rate of return from each security. Where W’s are the weights and R’s are the returns. g. How does your answer in f. compare to the answer that you found in b.? Please comment. The answers found in ‘b’ were returns for individual stock. By diversifying our exposure to three stocks, the return has dropped if we compare our portfolio with a portfolio which solely posses Abbot Laboratories stock. In comparison to Amazon.com’s stock, our return has jumped higher by from 10.56 to 14.3%. This is due to high weight age of Abbot’s security in our portfolio. For an investor, who owns solely Amazon’s security would be at a disadvantage as compared to us. Lastly, the return for our portfolio is far better than an investor’s portfolio which resides with only 3M’s security. The diversification is our portfolio has saved us from the loss and yielded a substantially high return in our favor. h. Calculate the beta of each individual security. Beta of each security is given as: Abbot Laboratories: 0.32 Amazon.com: 0.37 3M Co.: 1.14 i. How does your results compare with the one found in c? The result as compared to the one found in ‘c’ is consistent to an extent. For abbot laboratories, the result is consistent as both the answers yield that it is the least risky security among the three. As far as Amazon.com is considered, the result is not consistent with the previous findings. According to our analysis, Amazon.com is the most risky security for us however, the beta shows that the company’s stock does not increase or decrease substantially with the volatility in the market. Lastly, 3M Co.’s beta is substantially high considering the riskiness calculated by us. It has a beta of 1.14 which means that if the market return decreases by $1 then the stock return would reduce by $1.14. This is to an extent synonymous with our analysis as standard deviation of $6 as compared to the market price is higher than average. j. Calculate the portfolio beta using the formula: Where are the weights to you allocate to each security and are betas of each security. Weight for Abbot Laboratories is 60% Weight for Amazon.com is 25% Weight for 3M Co. is 15% Works Cited Finance, Yahoo. Yahoo finance. 2011. 2011 . Read More