Risk and Return Analysis

Topics: Investment, Risk, Macroeconomics Pages: 5 (1817 words) Published: May 14, 2012
Risk and Return Analysis Paper
FIN 402

Risk and Return Analysis Paper
Creating the right balance of securities in a diversified portfolio is crucial to maximizing return and minimize risk. This can be done through analysis of current and past activity of each product. Through a risk assessment, return analysis, researching the beta of each security, and reviewing the average risk and return, we can determine the weights of our securities and devise the strongest portfolio to limit risk and maximize return. As a team, we decided to remain with our original five investments; Ford, Microsoft, The Home Depot, Procter & Gamble, and UPS to create a strong diversified portfolio that will meet our expectations. Risk Assessment and Return Analysis

The risk assessment and return analysis should be performed for each of the companies in the investment portfolio. Since the companies in the portfolio belong to different industries there should be a good balance in the risk taken and returns. When one company’s stock goes down the others should not suffer. The returns of the other companies would help to cover the loss of the suffering company. UPS is a part of the Air delivery and freight service industry. Proctor & Gamble is a part of the Household products industry. Ford is a part of the automotive manufacturing industry. Microsoft is a part of the Application software industry. Home Depot is a part of the Home Improvement retail industry. The diversification in the choices of investments should help the portfolio. Each company has critical, essential, and non-essential business functions and processes. Some examples of business functions for UPS would be shipping and receiving, communication, information technology, and service. Proctor & Gamble has shipping and receiving, communication, sales, and inventory. Ford’s functions and processes are shipping and receiving, inventory, sales, and production. Microsoft’s functions and processes are shipping and receiving, communication, sales, and marketing. Some functions and processes of Home Depot would be sales, communication, inventory, and marketing. All of these functions and processes are important to the businesses. There are several threats that could interrupt the business functions and processes of the companies. One of the threats would be natural disasters, such as hurricanes, floods, and other severe weather. Another threat would be events caused by humans, such as theft of critical information and workplace violence. A third threat would be any information systems difficulties, such as registers or computers crashing. All of these threats can be considered vulnerable because they may experience the threats. Any of these companies would be able to handle any of these threats. Weights

Creating a diverse investment portfolio with securities weighted correctly allows for stronger risk management and stability. By reviewing past performance history of UPS, Proctor & Gamble, Microsoft, The Home Depot, and Ford as well as current risk associated with each investment, a portfolio can be properly proportioned to meet these goals. Beginning with the results of Ford, we can see by looking at the performance analysis that while there has been a slight decrease in the stock in 2009, Ford has increased its return almost 50%. At the same time, comparing results to the S&P whose results stayed level, concluding that Ford has results independent from the market with a beta of 2.36. This is a plus in the economy today that can be so volatile ( Yahoo Finance, 2011). Proctor & Gamble, on the other hand seems to follow the market very closely, beginning and ending with the same values. With a beta of .51 Proctor & Gamble would have a smaller weight in the portfolio. UPS is the investment that follows the market identically. The lines are almost one and this give UPS some volatility behind it; it is no surprise the...

References: Bodie, Z., Kane, A., & Marcus, A. J. (2007). Essentials of Investments (7th ed.). Boston:
McGraw-Hill/Irwin. Retrieved from
Hirt, G. A., & Block, S. B. (2006). Fundamentals of Investment Management (8th ed.). New
York, NY: McGraw-Hill/Irwin. Retrieved from
Yahoo Finance. (2011). Ford Motor Co. Key Statistics. Retrieved from http://finance.yahoo.com/q/ks?s=F+Key+Statistics
Yahoo Finance. (2011). Microsoft Corporation Key Statistics. Retrieved from http://finance.yahoo.com/q/ks?s=F+Key+Statistics
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