Essay on The Capital Asset Pricing Model
J&PInvestments is a newly formed portfolio management company. Our company held and managed a $1,000,000 portfolio, conducting 19 trades from September 27th, 2016 to November 15th, 2016. At the end of the trading period, the total return on our portfolio was 0.01%, our holdings as of November 15th, 2016 can be viewed in Appendix A. The purpose of this exercise was to observe how stocks move. We have included justifications for the stocks we chose, an analysis of the portfolio’s overall performance, and the associated risk characteristics. Furthermore, we examine Golar LNG Partners LP (GMLP) to better understand and compute a stock’s dividend growth model, CAPM, and P/E analysis.
Discussion and Analysis
When we began our investing we desired a diversified portfolio. We knew we had a short trading timeline and wanted to reduce our risk as much as possible.
The Capital Asset Pricing Model (CAPM) was the model used to analyze our stocks and portfolio. When doing our calculations, we used an assumed effective annual risk-free rate of 2.60%. We compared our portfolio against the S&P 500 Index, using the monthly return data. From the data, we calculated a geometric average for the market of 20.07%.
All of the companies we invested in were located in either the United States or Canada. When analyzing a potential investment we looked at the company’s cash flow. If the company was spending all or most of their money on capital expenditures, we tried to refrain…