Relationship between the risk and return of a single stock versus a portfolio.

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Table Of Content

Introduction

Rule one: Financial Health

Rule Two: Management Assessment

Rule Three: Outlook/Forecast

Rule four: Share Price Value

Rule five: Share Price Sentiment

Rule Six: Liquidity and Size

Rule Seven: Principal Activities

Rule Eight: Price Sensitive Announcement

Rule Nine: Following all above rules

Reference Lists

Introduction

In learning how to invest, understands Risk / return analysis or choice. Each investor wants to gain the highest possible risk (uncertainty) level, he is willing to accept. In a competitive market, which will lead to a trade-off. Investment, natural and low potential return low risk and high-risk investments with higher potential returns associated with it. The purpose of risk and benefit analysis is done by creating a balance of risk and maximize returns ; this can be done through effective portfolio management and risk diversification strategies (M.PHILLIPS, Gordon, 2011). The objective of this report is to investigate the relationship between risk and return of single stock versus portfolio.

Rule one: Financial Health

2012 Apple Corp shares from the beginning of the $14850 to $17167, an increase of 2317 millions of dollars of assets. See from the Apple Corp's assets on the balance sheet, the Apple Corp's investment is divided into short-term investments and long-term investment. The short-term investment started from 2012 18417 dollars by the end of the 23666 millions of dollars, a year increased by $5249. The increase is 28.5%. From this we can know the Apple Corp's investment is gradually increasing. In fiscal 2012, apple opened a total of 33 new Apple retail stores, 28 of them in American overseas, the apple retail store has reached a total of 390.

Apple Corp's profit distribution table can know, Apple Corp income increased from 39186 at the beginning of 2012 54512 at the end of millions of dollars to millions of dollars. To realize the reduction of 46333 from the previous year millions of dollars in revenue to increase the project, which is the annual income of not reducing the turning point - L. Of course, the cost is also a Apple Corp from the beginning of the $20622 increase to 33452 by the end of the million dollar. Compared with 2011 in 2012, apple nearly $1000 billion in research and development investment. The Apple Corp in 2012 in the product manufacturing tools and process spent roughly $9500 billion. In 2012, Apple Corp's business income is from the beginning of the 15384 million dollars has been reduced to 17210 by the end of the million dollar project. In the Apple Corp in 2012, the company for the distribution of profits from the first quarter of the beginning of the $87124 increase in the four quarter of 109567 millions of dollars. According to the new quarter Apple's earnings, the Apple Corp will be in the next three years, through dividends and stock buybacks way to return $45000 billion to investors. This is equivalent to the Apple Corp cash flow 1/3.

Blackberry fiscal third quarter net loss of $4400 billion by Reported in 2013,, and revenue last quarter fell $1600 billion to $1200 billion, intelligent mobile phone sales of nearly 1.9 billion, significantly lower than the previous quarter 3.7 billion. However, Blackberry or through some accounting methods, and holding the hands of Blackberry ownership from some hedge funds for cash and other means, let the amount of cash and cash equivalents own once a quarter of $2600 billion to $3200 billion. Quarter Blackberry up to $4400 billion in losses mainly due to the large number of inventory resulting in pretax impairment was about $1600 billion, as well as some long-term assets impairment of $2700 billion. In addition, the beginning of this year, Blackberry to save costs and jobs has led to the loss of an increase of $266 billion. In the continuing operations, Blackberry also lost about $965 billion.

Rule Two: Management Assessment

Rule Three: Outlook/Forecast

The return on year-end capital employed appears to be good when compared with last year increase from 7.1% to 11.2%, approximately 4% higher. However, this maybe misleading if the company’s non-current liabilities are under value. The Apple company has good contribution to the Black Berry company (controlling company) hence the orchard company obviously improved their earnings. The higher return on capital employed will keep the investors to keep doing investments at Apple Ltd.

The Black Berry net assets(equal to capital employed) turnover has decreased over the last year from 1.6 times to 1.17 times which means the company are not efficiency enough in turning its assets into revenue, because a low ratio could be a sign of inefficiency. The Black Berry has an increase in sales revenue of 30% base on last year. They also borrow money from bank (from “8% loan note” can know) to invest more projects to gain revenue.

This ratio has increased form previous year by 4.4% to 6.4%. It’s clearly that the net profit before tax an increasing trend. This indicates that the company is able to control its cost of sales, general and administrate expense. In this case, Chief Executive’s have a good job on control gross profit in this year. However, more information is required, it will help management to make up ground by cutting selling, general and administrative expenses. If the net profit before tax percentage is rising more slowly than the operating income percentage, it always make mistakes on interest expense. On the other hand, the Black Berry Company purchased the entire net assets of Apple Company; Apple Company has good contribution to the Black Berry Company. There is no a doubt that the Black Berry company’s revenue and profit are better than the last year

The data deteriorate from 2.5 to 0.86. It means that the lower liquid the firm is considered to be. This may be due to a number of factors. Such as fund turnover difficult, management has not wisely used debt. The higher the current ratio, the more capable the company is of paying its obligations. A ratio under1 suggests that the companywouldbeunable to pay offits obligations. It means that Chief Executive’s is not in good financial health in this year, it does not necessarily mean that it will go bankrupt. Is not good for the company.

Rule four: Share Price Value

In general, the investment risk of value stocks is lower than growth stocks. The value stocks pick companies with mature and stable commercial model, small fluctuation in cash flow and high rate in bonus principally. The value of those companies' stocks is low in P/E ratio, P/B ratio, fluctuating steadily and resilient strongly. Value stocks can stabilize market frequently when its value slides. (James, 2009)

Book-to-market equity and leverage represents one factor of risk called property predicament risk. Those companies in dilemma would be more sensitive for any change of credit term. However, companies in high book-to-market equity and leverage are those terrible in some basic aspects such as profit and sales generally, they are all creek in financial circumstance. Therefore, they are riskier than companies in low book-to-market equity and leverage.

Generally, compared with companies in low P/E, those higher ones show that the investors anticipate the improvement of income will be faster in future. Also, it is meaningless to compare the number of P/E with corporations in different fields, as the comparison between a science and Technology Company and a catering company. Since different fields have diverse prospect in growth.

P/E indicates that every unit of revenue obtained from the amount of money paid by investors. For example, let's consider a company's P/E is 20 at present, this means that investors are willing to expense 20 dollars for 1 dollar as profit.

From here we can see that the high income for those companies with high book-to-market equity and leverage is sort of compensation for the high risk they take. (Pettengill, 2013)

Rule five: Share Price Sentiment

In the calculation of risk and return for single stock, the risk is measured by the standard deviation, which is the square root of the variance. From the data obtained from the excel for two stocks which is attached in appendix, Apple inc’s annual average return is 49.56%, the risk related to this high return is about 37.64%, which is consider as high risk for a single stock. On the other hand, the annual average return for Citigroup is a negative figure, which is -3.89%, this means the stock price is decreasing in the 10 years time, this will cause losses to the investors and the risk associated with this losses is 51.41%, which is much more higher than the Apple inc, therefore, if a investor wants to choose between these two stock to invest based on the risk and return, Apple inc’s stock will definitely be a better choice, although the risk is high, the return is also high.

Rule Six: Liquidity and Size

In the calculation of risk and return for single stock, the risk is measured by the standard deviation, which is the square root of the variance. From the data obtained from the excel for two stocks which is attached in appendix, Apple inc’s annual average return is 49.56%, the risk related to this high return is about 37.64%, which is consider as high risk for a single stock. On the other hand, the annual average return for Citigroup is a negative figure, which is -3.89%, this means the stock price is decreasing in the 10 years time, this will cause losses to the investors and the risk associated with this losses is 51.41%, which is much more higher than the Apple inc, therefore, if a investor wants to choose between these two stock to invest based on the risk and return, Apple inc’s stock will definitely be a better choice, although the risk is high, the return is also high.

To sum up, firm size with P/E ratio is negative relation, in contrast, book-to-market equity and leverage with P/E ratio is positive relation. The reason of this phenomenon is that both small scale of company and high book-to-market equity and leverage represent higher risk, so does the yield rate.

Rule Seven: Principal Activities

Strengths: Apple Inc. Has been known as a mobile phone of the existence of the best quality. Its distribution network also spread widely throughout the world. Especially in Asia, many people still use the phone to communicate with each apple. This is also the world's second-largest mobile phone maker after Samsung. If we compare the high resale value of other companies, Apple phone. We can sell it as high as 50 percent, than their purchase value. Of course, we can not put the durability and reliability of their mobile phone side, is regarded as its strength. Weakness: Speaking of Apple's weaknesses, compare Blackberry and HTC, Apple seems to lag. It has very few service centers, rather than maintaining good service. In addition, Apple's failure to maintain its relationship with costumers of. It also has missed time, while the design of new products, such as the costumers have selected the Blackberry or Samsung recovery. Apple mobile phone design and performance also declined, more and more unstable. Although Apple has been trying to make new innovative software (Microsoft), a lot of people think it has been late apples, because many other companies have been improving faster and better.

Opportunities: Apple have ample opportunity to expand its business. With a wide range of products, features and different price ranges, different people, and it has about over competitors. With this opportunity to peak at Apple have the opportunity to increase its sales and market share. As the standard of living in India, increasing people's purchasing power increases as well, so Apple has for the right customers at the right time to get the most out of the situation. Threats: Apple is facing some all of which are investing heavily in the mobile phone industry, attempt to gain dominance, such as the threat of Samsung, Google and RIM, the company.

Rule Eight: Price Sensitive Announcement

In this case, a portfolio is made from a combination of stocks of Apple Inc. and Citigroup, if we want to measure the relationship between the two assets, correlation coefficient is used. The correlation coefficient is the relative measure of the relationship between two assets. The range of the correlation coefficient is between positive one to negative one, if the figure is positive, the two stocks are positively correlated, if the figure is a negative, this means the two stocks is inversely related. In the case of Apple Inc and Citigroup, the correlation coefficient is a positive figure, which is 0.22 approximately, this shows a weak positive correlation between the two assets, this indicates that if the stock price of Apple inc is moving up, the stock price of Citigroup may move up to a small proportion.

Conclusions

In conclusion, if investors want to reduce risk of investing in multiple securities, it is better to combine them into a portfolio. The key idea of portfolio management is to diversify the risk and help investors reduce the risk to the minimal level.

Reference Lists

(1) Alves, P. 2013, "THE FAMA FRENCH MODEL OR THE CAPITAL ASSET PRICING MODEL: INTERNATIONAL EVIDENCE",The International Journal of Business and Finance Research,vol. 7, no. 2, pp. 79-89.

(2) James, D. 2009,Stock returns, risk factor loadings, and model predictions: A test of the CAPM and the Fama-French 3-factor model, West Virginia University.

(3) Eraslan, V. 2013, "Fama and French Three-Factor Model: Evidence from Istanbul Stock Exchange",Business and Economics Research Journal,vol. 4, no. 2, pp. 11-22.

(4) Pettengill, G., Chang, G. & Hueng, J. 2013, "Risk-return Predictions with the Fama-french Three-factor Model Betas",International Journal of Economics and Finance,vol. 5, no. 1, pp. 34-47.

(5) Gunnlaugsson, S.B. 2006, "A Test of the CAPM on a Small Stock Market",The Business Review, Cambridge,vol. 6, no. 1, pp. 292-296.

(6) Bello, Z.Y. 2008, "A STATISTICAL COMPARISON OF THE CAPM TO THE FAMA-FRENCH THREE FACTOR MODEL AND THE CAHART'S MODEL",Global Journal of Finance and Banking Issues,vol. 2, no. 2, pp. 14-24.

(7) Sandsmark, M. & Vennemo, H. 2007, "A portfolio approach to climate investments: CAPM and endogenous risk",Environmental and Resource Economics,vol. 37, no. 4, pp. 681.

(8)John R. Dyson (2008) Accounting for non-accounting students. (pp. 222) London. Saffron House.

(9)Barry Elliott & Jamie Elliott (2013). Financial Accounting and Reporting. (pp. 709-713) London, Saffron House.

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