Portfolio Management Research Assignment Section 1) 1)
Introduction
The concepts that portfolio management research assignment will cover are earnings per share (EPS) and price earnings ratio (P/E ratio), and standard deviation of the mean. The portfolio analysis for data shown in table 1 for hypothetical organization such as XYZ Company and it will be by the use of P/E ratio analysis, and standard deviation of the mean. Table 1: XYZ Company’s Price Earnings Ratio for 2003-2007 Year Price Earnings Ratio 2003 12 2004 20 2005 18 2006 24 2007 36 The purpose is to identify and analyze theoretical and to compute it into practical calculations for identify various trends existing in investment selection based on risks existence to be made as per low or high numbers in relation. Therefore, the aim is to understand the theories and to analyze it accordingly with calculations and graph presentation that will enable to make quick decisions.
By the end of research assignment, there will be analysis whether XYZ Company is suitable for investment in 2008 based on varying levels of risks as per computations. Therefore, this will be enabling to determine if investor should invest in several portfolios or just XYZ Company.
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Portfolio Management Research Assignment Sec Section 2)
Earni arning ngss Pe Per Sh Share are (EP (EPS) S)
EPS represents the portion of profit that is in allocation for each share of common stock that is outstanding in that particular company. The representation of EPS is serving as the indicator of a particular company is making profit and considered as single variable that is most important for determination of share price. The results will show that if company is making profit then they will be having larger EPS indicating more earned profit in their per share value (Carrel, L., 2009). The computation of formula shown below:
It is possible to obtain data that will be showing EPS forecasting and the sources are investment advisory firms such as Standard & Poor’s and Value Line, brokerage house research, and financial magazines such as Money, Worth, Business Week, and Forbes or investors compute it by themselves (Hirt, G., Block, S., 2004).
Sec Section 3)
Price Ea Earning ningss Ra Ratio tio (P (P/E)
The comparison in P/E ratio is with the market value per share divided by earnings per share. The measuring is of relative value that will be indicating whether the future earning
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Portfolio Management Research Assignment will be growth or decline (Lasher, W., 2007). Therefore, it is very useful calculation for finding whether to make investment in particular company.
P/E ratio represents stock’s price per share to the stock’s earnings per share. The lower the P/E ratio is then the most attractive the stock will be for investors (Gibson, C., 2008). Such P/E ratio setting are by the investors where bidding price down or up with earnings relation. The factors that is affecting P/E ratio are economy’s growth prospects, stock market’s overall condition, historical analysis, EPS expected growth, EPS investor expectations, and inflation related in reversely such as P/E ratio rises when CPI declines or P/E ratio falls down when CPI is up (Chisholm, A., 2009).
The ratio analysis is different when evaluating individual stocks and it includes analysis of growth prospect, future performance (risks associated), and debt to equity ratio. In growth prospect, it shows that when the investor expectation is higher growth rate then P/E ratio will be higher too. While forecasting future performance, the influencing factors are when firm is having less debt representing higher value of stock in marketplace. Therefore, in high high P/E P/E rati ratio, o, the the expe expect ctat atio ions ns will will be posi positi tive ve in futu future re and and simi simila larl rlyy decl declin inin ingg of expectations when there is low P/E ratio (Hirt, G., Block, S., 2004).
Section 4)
P/E Ratio Analysis
According to figure 1, it shows that XYZ Company has good future performance and there is low risk. Therefore, the recommendation is that investors have the opportunity to make an investment in XYZ Company. In 2003-2004, there is growth in P/E ratio but slight
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Portfolio Management Research Assignment decline after this period in 2005. However, XYZ Company has three periodicals representing P/E ratio growth that is projecting good future performance. If there are chances for decline then it will be very low risk but higher returns in the future.
Accordingly, higher P/E ratios during 2006-2007 represents as improvement period from 2005 that is attractive investment with positive expectations. The observation is that the slope is moving upward trend for XYZ Company, which is positive and attractive number in relation with investment.
Figure 1: XYZ Company’s Price Earnings Ratio from 2003 to 2007
Section 5) 5)
Standard De Deviation
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Portfolio Management Research Assignment Stan Standa dard rd Devi Deviat atio ionn comp comput utat atio ionn for for XYZ XYZ Comp Compan anyy done done is in tabl tablee 2 (Eas (Easyy Calculation, 2010). The computation consists of mean, variance, and standard deviation calculation by the use of online calculation steps and excel sheet for automation.
n
Table 2: XYZ Company’s Standard Deviation Computation 2003-2007 Computation Formula Computation Number of values / Total number = 5 of values
∑xi / n
Mean
12+20+18+24+36 12+20+18+24+36 / 5 = 22
Excel Computation showing detailed calculation: Year 200 3 200 4 200 5 200 6 200 7
Price Earnings Ratio (X)
X-M
X-M²
12
(12-22) = -10
(10²) = 100
20
-2
4
18
-4
16
24
2
4
36
14
196
∑ (X-M)² 320 = 320 / 4
Vari Varian ance ce and and Stan Standa dard rd Deviation
= 80 =√80 = 8.94
Sect Sectio ion n 6)
Stan Standa dard rd Devi Deviat atio ion n Anal Analys ysis is
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Portfolio Management Research Assignment Standard deviation represents the distribution’s variability around mean and it is the vari varian ance ce’s ’s squa square re root root (Sie (Siege gel,l, A., A., 2011 2011). ). Such Such comp comput utat atio ionn help helpss inve invest stor orss in the the determination of whether investment potentiality will tend to decline or project growth.
Lawton, P., and Jankowski, T., 2009, states that when there is higher standard deviation deviation the band will be wider wider where where portfolio portfolio risk measuring measuring takes place. place. The larger the values of standard deviation will be then the greater risks involved. Accord According ingly, ly, the inves investor tor makes makes inves investme tment nt only only in XYZ Compan Companyy then then risk risk relevancy will be in relation to single stock investment consisted in respective portfolio of the invest investmen ment.t. Howev However, er, we shall shall determ determine ine based based on relate relatedd years years showin showingg varian variance ce to standard deviation analysis for the given portfolio in table 3 for each periodical times. The representation will be whether XYZ Company is under spending that is less than planned spending showing positive variance and standard deviation or vice versa. Year 2003
Table 3: Standard Deviation Analysis on Yearly Basis P/E Ratio Computation Variance Standard Deviation 12 N = 2 =32/ 1 √32 M = 12+20/2=16
2004
20
=32
=5.65
∑X-M²= N=3
=34.65/ 2
√17.325
M = 12+20+18/3= 16.67
=17.325
=4.16
X-M² (12-16)²= 16 (20-16)²= 16
2005
18
X-M² (12-16.67)²= 21.80
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Portfolio Management Research Assignment (20-16.67)²= 11.08 (18-16.67)²= 1.77 ∑X-M²= 34.65 XYZ Company is under spending because standard deviation is below than previous year. Due to this reason, there is decline in 2005.
Year
Table 3: Standard Deviation Analysis on Yearly Basis (continued…) P/E Ratio Computation Variance Standard Deviation N = 4 =75/ 3 √25 M = 12+20+18+24/4=18.5
=25
=5
∑X-M²=75 N = 5
=320/ 4
√80
M = 12+20+18+24+36/5=22
=80
=8.94
X-M² 2006
24
(12-18.5)²= 42.25 (20-18.5)²= 2.25 (18-18.5)²= 0.25 (24-18.5)²=30.25
X-M² (12-22)²= 100 2007
36
(20-22)²= 4 (18-22)²= 16 (24-22)²=4 (36-22)²=196 ∑X-M²=320
During 2006 and 2007, there is big difference and it shows that XYZ Company did over spend spendin ing g than than usual usual.. This This puts puts the posit position ion of the the inves investme tment nt at quest question ion wheth whether er inve invest stme ment nt was was for for impr improv ovem emen entt or ther theree were were loss loss to cove coverr it. it. More Moreov over er,, it is
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Portfolio Management Research Assignment questionable whether there are possibilities and reserves for next year development and improvement that will create good marketplace.
Standard deviation of the mean curve will help us determine where the slope will be moving toward in 2008. Dowd, K., 2005, states that positive curve skewing will represent and indicate as good year for investors while negative curve skewing will represent and indicate as loss. The investor should select portfolio that will be maximizing expected return with minimized risks.
Accordingly, the lower the standard deviation will be then the lower will be the risk for loss. In 2007, the standard deviation is higher than previous year showing difference of 3.94 so higher the standard deviation then the risk will be higher. Curve shown in figure 2 and figure 3 will be directing whether it will be loss or profit in the following year.
Figure 2: Standard Deviation of the Mean (All the t he Business, 2011)
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Portfolio Management Research Assignment
Figure 3: Standard Deviation of the Mean Curves (All the Business, 2011)
According to figure 4, we can see that XYZ’s Company is showing slightly negative skewing curve. Where, standard deviation of the mean is standing from -1 to +2. This shows that there are higher and greater chances for negative outcome in 2008 rather than positive results.
Therefore, if there is investment making then gains will be small and losses will be extremely high. The indication is that high probability of negativity is 80% loss and this indicates that profit or gain will be only 20% that is not attractive. Such indication shows that XYZ Company’s portfolio will not have payback for any degree of profit for any amount of investment but there will high loss with high risks r isks and low returns or profit for investors.
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Portfolio Management Research Assignment
Figure 4: XYZ Company’s Standard Deviation of the Mean Curve 2003 to 2008 (California State University, 2011)
Section 7) 7)
Conclusion
In conclusion, I have learned a lot from portfolio management research assignment. assignment. It shows that P/E ratio is not enough for analyzing whether there will be profit opportunity from investment but there is need for several portfolio analyses for findings analysis. Based on the historical data of XYZ Company, it shows that it is not suitable to make investment in 2008 and it will not be a good year for investors due to high standard deviation of the mean and negative curve.
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Portfolio Management Research Assignment There are several factors that is indicating possibilities for being not attractive even though there is P/E ratio because standard deviation of the mean shows high differences during 2006 and 2007 that is proving that XYZ Company:
Made huge investment for improving current status of company in 2006-2007 and limited investment for the following year 2008, Loaned to fund their business functions and activities where year 2008 and later might be years for paying back these debts, Risking future reserves and profits to improve current profitability, and Over spending, that affects future improvement potentials and needs.
The recomm recommend endati ation on is that that invest investor or shoul shouldd not make make invest investmen mentt due to high high possibilities of risk and no opportunity for profit. The investor should start looking for another portfolio that is possessing high probabilities of positive outcome and low risk level.
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Portfolio Management Research Assignment Section 8) 8)
Bibliography
All the Business. (2011). Standard Deviation of the Mean . Retrieved April 7, 2011 from http://www.allbusiness.com/glossaries/norma http://www.allbusiness.com/glossaries/normal-distribution/4948223-1.html l-distribution/4948223-1.html
California State University. (2011). Standard Deviation – Normal Distribution Calculator . Retrieved
April
7,
2011
from
http://www.math.csusb.edu/faculty/stanton/p http://www.math.csusb.edu/faculty/stanton/probstat/normal_distribution.html robstat/normal_distribution.html
Carrel, L. (2009). Dividend Stocks for Dummies. New York: For Dummies.
Chisho Chisholm, lm, A. (2009) (2009).. An Introd Introduct uctio ion n To Inter Internat nation ional al Capit Capital al Marke Markets: ts: Produc Products ts,, Strategies, Participants.
New York: John Wiley and Sons.
Dowd, K. (2005). Measuring Market Risk. New York: John Wiley and Sons.
Easy Calculation. (2010). Standard Deviation - Calculator . Retrieved April 7, 2011 from http://easycalculation.com/statistics/standard http://easycalculation.com/statistics/standard-deviation.php -deviation.php
Gibson, C. (2008). Financial Reporting and Analysis (Book Only). New York: Cengage Learning.
Hirt, G., Block, S. (2004). Managing Investments . New York: McGraw-Hill Professional.
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Portfolio Management Research Assignment Lasher, W. (2007). Practical Financial Management . New York: Cengage Learning.
Lawton, P., and Jankowski, T. (2009). Investment Performance Measurement: Evaluating and Presenting Results. New York: John Wiley and Sons.
Siegel, A. (2011). Practical Business Statistics . New York: Academic Press.
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