Hypothetical Portfolio
Our equally weighted portfolio includes Apple (AAPL), Whole Foods Market (WFM), Exxon Mobil (XOM), Citigroup (C), and Nordstrom (JWN). All of the companies chosen are paying dividends quarterly, and make up to 6.557% of S&P 500 as of today.
From 2011 until today we see that our portfolio has had, return-wise, a similar performance to the S&P 500 with around 11% annual returns. Also, the correlation coefficient of 0.85 tells us that our portfolio is highly correlated to the S&P 500 index. Both returns and correlation can be explained by our stock picks. WFM, AAPL, XOM, C, and JWN have significant weights in the S&P 500 index. Interestingly, our portfolio had volatility of 1.23%, measured by standard deviation, …show more content…
We assumed risk free rate of 1.85% and market risk premium of 9.5%. After doing our research we concluded that the market risk premium of 5.25% is inadequate. We calculated Beta for each stock using data that spans one year back from April 6th. From there we used CAPM to find each stock’s risk premium in order to come up with a discount rate to use in our Growth Dividend Discount Model. We had to assume dividend growth rate for each stock which is a big factor in estimating the intrinsic stock value. Small changes in dividend growth result in huge differences in the intrinsic value of the companies because this valuation method discounts the future cash flows determined by the dividend growth estimates to determine the intrinsic value. When we applied the Dividend Growth Model, we found that the results we got were far off reasonable estimates. DGM could only be applied to stocks that are expected to pay out stable dividend over indefinite future; therefore, trying to apply it to companies like AAPL, WFM, or C is not realistic. Whole Foods has faced a significant decline in price in the past 18 months due to cannibalization effects from their rapid expansion of new stores and increased competition in the natural and organic food industry. Apple has seen modest gains (7.67%) in the past year and a half but they have been significantly less than in years past. Citi has performed …show more content…
On top of that, our portfolio has a correlation of 0.89 with the S&P 500. Each of our stocks are heavily subjected to market risk due to their correlation with the market, fortunately, they are not too correlated between one another.The most heavily correlated stock is XOM, with a positive correlation of .731. AAPL is actually negatively correlated to commodities with a value of -.134. This is due to the fact that AAPL is a technology centric consumer goods company. It also has established very strong margins as compared with its competitors. Its operating margin at the end of 2015 was 31.86%. The 0.55 correlation between Exxon and Citi is important to note considering that Citi has increased its loan loss reserves by $250 million for their oil and gas clients in response to decade lows in oil prices. Citigroup could benefit from higher interest rates, but because it has a lot of assets overseas, the interest hike won’t be as beneficial for them as it is for other major banks. From a macro standpoint, the possible future increase in interest rate by the Fed as well as the new OPEC oil agreements could increase the volatility of at least two companies in our portfolio, Exxon and Citibank, which would result in an increase in the riskiness of our
Our equally weighted portfolio includes Apple (AAPL), Whole Foods Market (WFM), Exxon Mobil (XOM), Citigroup (C), and Nordstrom (JWN). All of the companies chosen are paying dividends quarterly, and make up to 6.557% of S&P 500 as of today.
From 2011 until today we see that our portfolio has had, return-wise, a similar performance to the S&P 500 with around 11% annual returns. Also, the correlation coefficient of 0.85 tells us that our portfolio is highly correlated to the S&P 500 index. Both returns and correlation can be explained by our stock picks. WFM, AAPL, XOM, C, and JWN have significant weights in the S&P 500 index. Interestingly, our portfolio had volatility of 1.23%, measured by standard deviation, …show more content…
We assumed risk free rate of 1.85% and market risk premium of 9.5%. After doing our research we concluded that the market risk premium of 5.25% is inadequate. We calculated Beta for each stock using data that spans one year back from April 6th. From there we used CAPM to find each stock’s risk premium in order to come up with a discount rate to use in our Growth Dividend Discount Model. We had to assume dividend growth rate for each stock which is a big factor in estimating the intrinsic stock value. Small changes in dividend growth result in huge differences in the intrinsic value of the companies because this valuation method discounts the future cash flows determined by the dividend growth estimates to determine the intrinsic value. When we applied the Dividend Growth Model, we found that the results we got were far off reasonable estimates. DGM could only be applied to stocks that are expected to pay out stable dividend over indefinite future; therefore, trying to apply it to companies like AAPL, WFM, or C is not realistic. Whole Foods has faced a significant decline in price in the past 18 months due to cannibalization effects from their rapid expansion of new stores and increased competition in the natural and organic food industry. Apple has seen modest gains (7.67%) in the past year and a half but they have been significantly less than in years past. Citi has performed …show more content…
On top of that, our portfolio has a correlation of 0.89 with the S&P 500. Each of our stocks are heavily subjected to market risk due to their correlation with the market, fortunately, they are not too correlated between one another.The most heavily correlated stock is XOM, with a positive correlation of .731. AAPL is actually negatively correlated to commodities with a value of -.134. This is due to the fact that AAPL is a technology centric consumer goods company. It also has established very strong margins as compared with its competitors. Its operating margin at the end of 2015 was 31.86%. The 0.55 correlation between Exxon and Citi is important to note considering that Citi has increased its loan loss reserves by $250 million for their oil and gas clients in response to decade lows in oil prices. Citigroup could benefit from higher interest rates, but because it has a lot of assets overseas, the interest hike won’t be as beneficial for them as it is for other major banks. From a macro standpoint, the possible future increase in interest rate by the Fed as well as the new OPEC oil agreements could increase the volatility of at least two companies in our portfolio, Exxon and Citibank, which would result in an increase in the riskiness of our