Portfolio Analysis: Returns and Risk

The stock market is the market of volatility which helps the investors to gain or to lose their investments. The economic theory of a market suggests that when one party loses then another party gains from their investment. The price of a stock is subject to the demand and supply of the particular stock, but the underlying company performance has a prodigious influence on the stock price of a specific company. Financial theory of Markowitz suggests that to reduce the risk of losing investment value a proper portfolio construction is a must thing to do. Following the portfolio theory of Harry Markowitz, we have constructed our portfolio which includes the stocks of Costco, SNAP Inc., AKARI Therapeutics plc, and Salesforce.com Inc. The portfolio was constructed following the diversification strategy, in other words, we wanted to construct a zero-covariance portfolio. We could construct an independent portfolio which would have a little or no relation to the market movement, but the portfolio lost its value after exhibiting an optimistic performance at the first week while the markets were losing value. The first-week jump in the overall portfolio value has ensued for the positive financial report of Akari Therapeutics plc which started falling in the subsequent week resulting in a reduced portfolio value. During the third and fourth week, we perceive a hike in the price of COST and CRM that derived a positive return for the portfolio. Reason behind the price hike of COST was a dividend declaration and CRM had published a positive quarterly report in favor of the shareholders of the company. At the very last week, a sharp fall in the price of Akari Therapeutics plc reduced the overall value of the portfolio towards a negative return.

The risk-return calculation suggests that the portfolio performance was notably fluctuating throughout the holding period, starting from a rise of 9.66%, -4.10%, 1.94%, 2.05%, -6.13%, -7.02%. The portfolio generated a negative return (-0.6%) over the holding period of the investment amount, and the portfolio evidently showed a significant volatility (6.37%). We have concluded from volatility calculation that our constructed portfolio is far riskier than the Vanguard S&P 500 index (0.87%), QQQ index (1.33%), and Global index (1.11%). Our constructed portfolio is showing a zero covariance which advises that the portfolio return is totally independent of the return of the market portfolio. Our portfolio is exhibiting a higher risk because of the stocks we picked for the portfolio construction; using the CAPM model we tried to calculate the diversifiable risk of the stocks selected for the portfolio. The selected stocks have a significance difference in their beta- COST (0.9), AKTX (-9.9), CRM (1.29) which implies a huge difference in their Alpha- COST (20.6%), AKTX (793%), and CRM (126%). It is clearly visible that inclusion of Akari Therapeutics into the portfolio has increased the portfolio risk drastically. Comparing the portfolio return with market return we conclude that our portfolio return (-0.6%) was better than QQQ index (-0.88%) but worse than VFINX (0.33%) and VHGEX (0.84%). The reason for having a negative return is the selection of wrong stocks in the portfolio. There are many reasons of price volatility in the stock market, or in the price of a particular stock, such as market demand-supply, company’s financial performances, and movements of economic forces are the major reasons market volatility. The exercise has helped us to learn about effective portfolio construction, and analyze the constructed portfolio’s performance for effective management of risk and return of an investment.

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