the portfolio risk
Stock name | First-year return | Fifth-year return |
Xylem INC | 11.78% | 9.92% |
Noble Energy INC | -5.34% | 5.21% |
Align Technology INC | 29.61% | 36.62% |
Progressive Corp. | 19.81% | 13.93% |
Trane technologies PLC | 12.71% | 9.66% |
It is known that investors are hesitant to place their punts on a single stock. They overcome this problem by investing in different types of investments so as to reduce the risk of losing out. This strategy presents the portfolio risk. A portfolio is formed from a group of stocks that have very diverse risks so as to reduce the probability of them crushing at the same time (Qsstudy, n.d.). The disadvantages associated with a standalone include the fact that the investor has to deal with the individual deviation that the stock undergoes, the coefficient of variance associated with it among many other factors. The advantages of a portfolio include portfolio variance and portfolio deviation that comes about from diversification of the risks. The main reason I chose the five stocks is that they have different risk factors when combined, which means I am less likely to lose my investment. I also chose the stocks based on their recent performance.
One common question is the fact that stocks are very volatile in nature. They are constantly changing whether it is upwards or downwards. How does risk aversion affect stocks on the market? Capital markets theory suggests that the stocks should be more stable than they actually are. However, evidence shows that they are prone to frequent swings in the market. This is caused by the fact that most investors are risk-averse. This means that people are more concerned when they lose money than when they gain it; hence, they affect the prices of these stocks. This means that the market becomes very volatile over time and more predictable for the stock that carries the least amount of losses (Stephen, 2013). A good example is the fact that people prefer to invest in T-bills that often have very low profits, but are guaranteed as opposed to stocks that have high-risk factor and larger profit margins, but the investor could lose the investment.
Stock prices and intrinsic value are very different from each other. A stock price is defined as the current valuation that is placed on a stock and it is easier for a company to track its value. Intrinsic value is referred to as the ‘actual’ value that is placed on the stock by an investor and it is harder to observe; hence, companies settle for estimations (Maverick, 2020). These two values are both important in their own way depending on the buyer’s needs for the stocks, i.e., whether it’s a long term or short term investment. The general consensus that it is generally better to put your investment based on a higher intrinsic value than higher market value. That is because the intrinsic value portrays the true financial performance of the compared over an extended period as opposed to a stock price, which may be deceiving. A lot of analysis and research goes into the determination of the intrinsic value; for example, the financial statement of a company, the nature of the business plan that the company adheres to, and thorough market analysis. However, it is a hard value to determine because many analysts have different valuations of different assets within a company.
Reference
Macrotrends. (n.d.). Xylem return on investments. Retrieved from: https://www.macrotrends.net/stocks/charts/XYL/xylem/roi
Maverick, B. (2020). Intrinsic value versus current market value: what the difference? Retrieved from: https://www.investopedia.com/ask/answers/011215/what-difference-between-intrinsic-value-and-current-market-value.asp
Stephen, F. (2013). Can risk aversion explain stock price volatility. Retrieved from: https://www.frbsf.org/economic-research/publications/economic-letter/2013/april/risk-aversion-stock-price-volatility/#:~:text=If%20investors%20are%20risk%20averse,investors%20as%20being%20risk%20neutral.&text=By%20%E2%80%9Cprice%20volatility%2C%E2%80%9D%20I,of%20stock%20prices%20over%20time.
Qsstudy. (n.d.). Differentiate between portfolio risk and stand-alone risk. Retrieved from: https://www.qsstudy.com/business-studies/differentiate-between-portfolio-risk-and-stand-alone-risk