Essay: Analysis Of A Diversified Portfolio Of 5 LSE Stocks

Market Capitalization and Issued Capital of Portfolio Stocks

The purpose of this report is to analyze and present the performance of a portfolio of stock consisting of five stocks listed on The London Stock Exchange. Stocks were chosen randomly from different sectors and thus the resulting portfolio is a diversified portfolio with representation from various sectors. The report contains the discussion about the market capitalization, issued capital and the description about the sectors they belong to. The price movement of the stocks included in the portfolio, for the period of 30^th November 2016 to 30^th November 2019 has been presented graphically and has been analyzed outlining the best and worst performer stock out of all. The final section of the report contains the analysis of the risk characteristics of the stock compared with the market. The systematic and unsystematic component of each stock has been scrutinized comprehensively and presented in a detailed manner.

1A.

The following table demonstrates the sectors to which all the stocks included in the portfolio, belongs to:

The portfolio containing the above mentioned stocks can be considered as a diversified portfolio as all the stocks belong to different sector. A diversified portfolio is made up of a variety of investments that work together to lower an investor's total overall risk. Diversification entails holding shares from a variety of businesses, nations, and risk levels, as well as bonds, commodities, and property investment (Statman 1987). Although this portfolio is not diversified across asset classes as the only asset class used for investment here is equities, the portfolio is diversified within the asset class with different stocks representing different sectors.

The following table represents the market cap and the issued capital of all the stocks that makes up the portfolio:

British Petroleum PLC is the biggest company in terms of market cap that is included in the portfolio, with a market cap of 70.005 billion. BP Plc also has the highest issued capital with 5383 million. The second biggest company in the list is Glencore PLC which belongs to the industrial metals and mining sector and has a market capitalization of 51.23 billion. The issued capital of the company is 146 million and it is one of the lowest amongst the rest of the portfolio constituents. The smallest market cap company in the list of the constituents is BAE Systems Ltd with a market cap of 17.404 billion and issued capital 87 million. CRH PLC and Barclays PLC has market cap equaling 30.272 billion and 33.58 billion respectively with the latter having the second highest issued capital. The issued capital of the CRH PLC is 334 million which is the second lowest of all the stocks.

The following section contains the analysis of the stock price movement for the period starting from 30^th November 2016 to 30^th November 2019.

The stock price at the starting of the period was GBP 467.90 and at the end of the period GBP 503.23. The stock has gained value during the period, providing returns of about 5.6154% for the period analyzed. The stock has seen a dip in price during the end of 2018 and beginning of 2019. The price has then risen steadily near the end of the period of assessment.

Price Movement Analysis of Portfolio Stocks

The stock price at the starting of the period was GBP 195.35 and at the end of the period GBP 159.03. The stock has performed poorly during the period and has returned negative returns to the levels of -1.6641%. The stock as seen in the graph has witnessed a steady decline in the price due to the poor performance of the banking sector as a whole. Although the stock price has shown some positive movement near the end of the assessment period, rising from GBP 126.83 in the month of August to the GBP159.03 in the month of November 2019.

The stock price at the starting of the period was GBP373.74 and at the end of the period GBP 424.73. The stock has performed outstandingly during the period starting from 2016 to 2019. The stock has returned 18.91% returns during the period which is the highest of all stocks included in the portfolio. The stock has witnessed a steady rise in value after a dip in the beginning of the period. At the end of the assessment period which is November 2019, the stock has witnessed a dip in value. This is the only stock in the portfolio that has yielded double digit returns.

The stock price at the starting of the period was GBp 2435.04 and at the end of the period GBp 2534.36. The stock price movement of this company is mostly sideways which is demonstrated by the fact that the stock witnessed a steady decline starting from 2016 to beginning of 2018, then it recovered slightly only to go down in the latter half of 1028. The stock price has then risen steadily from lowest price of GBp1875.25 to GBp2626.37. This stock also has provided positive returns during the examined period with a return of 6.1194% and is the second largest contributor to the portfolio profitability.

The stock price at the starting of the period was GBp 207.28 and at the end of the period GBp 198.15. The price of the stock has risen during 2017 peaking in the month of January 2018 only to witness a fall in price thereafter. As a result the stock has yielded negatively with -1.44% returns.

The following table presents the statistical observations from the regression conducted using the stock returns that are included in the portfolio and FTSE All share index return, for the period of 30^th November 2016 to 30^th November 2019.

The component of systematic risk is explained by the beta value as it measures the comparative movement of stock price with the market price. The most sensitive and riskiest stock to invest based upon the beta value, is the stock of BAE systems ltd as it has the highest beta of 1.52. This beta figure indicates that if the FTSE all-share index moved 1%, the stock price of BAE Systems would change 1.52 times. The beta p-value is likewise close to 0, indicating that the value is statistically significant. The stock of Barclays Plc has a beta value of less than 1, which is statistically significant as indicated by the p-value; so, it is a great investment since it will outperform the market index during downturns due to its negative correlation with the index. Although the R square is less than 20%, it suggests that market movement does not strongly predict stock return movement. The stock of BP Plc also has a beta value greater than 1, indicating that it is riskier to invest in than the market index since it may result in greater losses during moments of uncertainty. The beta's predictive value is likewise statistically significant, and the model's R squared is quite strong, at roughly 52 percent. CRH Plc and Glencore Plc both have high beta value at 1.11 and 1.15 respectively with R-squared value of 42% and 20% respectively. This shows that the market index is a good predictor of the movement in stock of CRH PLC but not so much for Glencore PLC. The statistical significance of the beta of both the companies are provided by the near zero p-value.

Conclusion

The goal of this paper was to assess and show the performance of a stock portfolio comprised of five London Stock Exchange-listed stocks. Stocks were picked at random from various sectors, resulting in a diverse portfolio with representation from a variety of industries. The report includes a review of market capitalization, issued capital, and a description of the industries in which they operate. The price movement of the equities in the portfolio from November 30, 2016 to November 30, 2019, has been visually represented and examined, with the top and worst performers being highlighted. The report's last part offers an examination of the stock's risk characteristics in comparison to the market. Each stock's systematic and non-systematic components have been thoroughly examined and presented in a precise way.

References

Statman, M., 1987. How many stocks make a diversified portfolio?. Journal of financial and quantitative analysis, 22(3), pp.353-363.