Why Investors Would Want You to Determine Your Portfolios Performance - Essay Example

Market Analysis and Report Market analysis study investigates the short run response to the stock prices to the arrival of macro-economics updates. We will particularly consider the way interest rates react to economic and financial news, and to familiarize ourselves with the stock and portfolio returns. It is shown in various studies that the stock market response does not have effect only to the company but it also creates unemployment and also reduction in the market consumption. The rate at which stock market response creates unemployment also depends on whether the economy is expanding or contracting. Stock market is being used to measure the effect of economic diversity; therefore it means that the economy is always in an expansion phase. This follows that the stock market always rises on bad news from labor market. The odd pattern of stock prices response is pointed out by Boyd, John and Jagannathan (2001) that, the expected rate of growth of corporate earnings and dividends, the equity risk premium, and the risk-free interest rate determines stock prices. To invest in companies, investors make decisions that are based on certain factors such us; I. 52-week range – investors have to make sure that stock is on a rebound if it is near the low, because the stock may drop further and create a new low. Despite the price fall stock can always go in both directions. Investors should stop the assumptions that stock can’t go any lower. If a stock is trading near 52-week high it should be avoided since it will likely to hit a resistance level and shoot downwards. II. Price/earnings ratio – this is a critical measure in evaluating stock. Calculating it is not always necessary since it is listed on the quote page of the stock, but it is sometimes important for the investors to follow the formulae to get to understand the relationship between the numbers and also to have an idea of how to tell if a stock is overpriced or underpriced. And it is important for investors to look for companies with low PE ratio when the market is performing better. III. Market cap – if investors have to buy the company they would have to buy the entire stock. Market cap is the overall price to buy a company, and it can be used to classify the size of the company into one of the following categories, micro, large or mega. By considering the market cap investors will know that the larger the company the stable is the stock and safe to invest into. Looking for market cap or size is to find something that matches risk tolerance. These three factors are the most important indicators that investors should consider while investing. The paper will take into comparison two companies that is the Saga Communication Inc. and the C&F Financial Corporation Bank. The companies analysis will be based on a 3 month treasury note, 10 year treasury note, NYSE, NASDAQ, Dow and Jones and S&P 500. The comparison will be on a weekly based starting from September 17th 2013v to November 14th. The study is also to find factors that create the different changes in stock values. To calculate the stock return and the portfolio we will use arithmetic and geometric methods. Arithmetic mean Is simply the sum of series of some numbers divided by the count of that series of number so as to get the mean.. Arithmetic mean is used to report central tendencies and is mostly used in the fields of economics, statics. Geometric mean This is a type of mean or average that indicates the central tendency or typical value of a set of numbers. This method is slightly different from the arithmetic method in that the numbers are multiplied and then finding the nth root. Dow and jones Is one of the largest indices in the world today and the its’ industrial average is weighted for 30 stocks found in the NYSE. The DJIA Company was created by Charles Dow on May 1896 and is currently owned by S&P Dow Jones Indices. The performance of DJIA on Thursday was high, but the gains were driven by stocks that investors tend to buy when they want to avoid risk. The positive result shown last month for the average returns of DJIA means that the stock index is doing well even with the difficult market forces that prevail. During the month the DJIA Company gained 54.59 points that is 0.3 percent, to close at 15876.22. They are factors that contributed to the better positive result but the main factor is the anticipated Twitter IPO (Yahoofinance.com). Such factors have faced mixed reaction from investors and financial analysts. Most of them believe that stock can do best in the stock market currently while others believe that the stock values will drop. Dow Jones has good control of their finances and they also have good and stable policies. The investors always focus their attention in the financial performance of the business before they decide to invest. S&P 500 Is stock market indexes that base its outcome comparison on 500 different large companies but with more less the same common stock values. This kind of index is different from the other types since its methods is consistence and diverse. In my data the arithmetic mean of S&P 500 indicates a positive value of 31.98%; it therefore means that the company’s stock prices are stable. The negative value is because different companies have got different stock values and it also implies that the returns from these different companies will be diverse in future. 3 month Treasury note Based on the available data the Treasury note has been having an excellent performance of positive return of 7953.60% arithmetic return. The performance is indicated by the security that comes with Treasury bills. Treasury notes has got some characteristic such as; guaranteed return, are risk free. Investors will adverse most risk and prefer such investment as opposed to investments that are risky. The geometric and arithmetic mean of 3-month Treasury notes is 928.69 and this is because investors have confidence in the company’s notes. The reason as to why most investors will rely for this information for decision making is because the return will always be guaranteed since it accrues. 10-year Treasury note The geometric mean of the ten year Treasury note is higher than the arithmetic mean. A ten year treasury note is an investment in which investors will get back what they invested in the company. This long term investment type is always considered by the investors with long term goals. The long term investment is shown by the result of the geometric return of 275.15%. This kind of investment is not advisable for people who are after quick returns, since the only return that investors will gain is the interest only. The ten year investment can be used by banks such as C&F Financial corporations. As shown by the data the ten year treasury bond has an arithmetic mean return of 64.82% showing a good performance. NASDAQ It is the largest stock exchange market that exists in the world today. NASDAQ has an arithmetic mean of 76.02% and that is because investors and companies believe in the stock market. While geometric mean return is 244.10% indicating a positive return is 244.10% . The companies that put their stocks in this kind of stock market will gain from the number of investors who are interested in the stock market. The reason is because the fact that the stock market is governed by laws and policies that are followed fully by shareholders, that governance is an important factor that ensures the strength of any ventured. Most companies have preferred funding’s from private investors as opposed to contributed inner capital. It is because shareholders and investors will not demand a payment of dividends such as those from other sources such as bank loans. It therefore indicate that, the proper management of the NASDAQ has encouraged more investors and hence the good performance of the stock market. NYSE It is the largest stock exchange of its time by its market capitalization. It is said that investor would only want to invest into the market and that can be an encouragement to many companies to put their stocks into exchange market. The stock return using arithmetic mean is 56.42% while the portfolio return is 66.81%. The mean is really high indicating the fact that NYSE is the largest stock market in the world. Saga communication Inc Saga is a broadcasting company that is primarily engaged in acquiring, developing and operating broadcast properties. Due to good market strategy and high stock returns, in February 2013 the company owned and operated four television stations and four other low-power stations that were serving two markets. Saga being I highly developing company it will therefore be important to them to understand the pattern of stock prices responses over the business cycle. According to the data available the stock return for Saga Communication Inc. indicates an arithmetic mean of 4.44 (44.38%). The positive value therefore indicates a better investment. The geometric mean of the company is a positive value while the geometric return is also a positive value of 14.41 and 144.11% respectively. This shows that the company is developing and it is advisable for investment. C&F Financial Corporation This company is more of a commercial bank. It consolidates the citizens and farmers and even some small business people. The corporation bank has five wholly owned subsidiaries such as C&F Mortgage Corporation, Settlement Services LLC, Certified Appraisals LLC, C&F Insurance Services Inc. and C&F title Agency, Inc. being a bank it operates in three business activities such as retail banking through C&F bank, mortgage banking through C&F Mortgage Corporation. And consumer finance. Arithmetic mean of this company is -7.59 and the stock return is valued at -75.88% while the geometric mean is 42.09 while the return is 420.90%. Discussion The question that every investor in a business want to know is how well am I doing? But the question you should ask yourself is what return is? These questions are very complex. Of course people would love seeing dollars growing from their business but investors want that translated into performance. The reasons as to why investors would want to you to determine your portfolio’s performance is to see if the long term terminal value that you hope to achieve with your investment plan is realistic. Multiplying the figures by negative 1 or positive one of the net additional value is to create midpoint average for the cash flow regardless of when they were actually made. It is only advisable to use the geometric mean if there is additions and some deductions to be made, and in any case there is no deduction and additions to be made it is advisable to use the first method of calculating returns. According to our portfolio results it shows negative sign for geometric mean and that means the business is running at a loss regardless of the expanding economic phase. It therefore shows that measuring portfolio helps you assess the accuracy of the long-term return assumptions the business made when determining its assets allocations. The point is to determine the effect of equity risk premium and growth expectation. Equity risk premium is affected by the response of the stock prices, and it always increases with the arrival of the changes in stock prices significantly. And it is evident that growth expectations change in response to the bond value. To understand the pattern of stock price response has said is to examine the effect of news arrival in a business cycle. For the returns of mutual fund holdings, you can use of the many publications information on mutual fund performance. You have to consider the samples of set of stock values of one week span. It is advisable to consider both methods of calculating return on portfolio. Get the narrow view and give the comparison of the two approaches. The table shows some stock values for a period of time. The impact of adjusting any net additions or withdrawals is important because money added to the original investment is believed to be no part of the investment’s return, but it seems that any additions earns is part of the return. Scott (1998) showed that the equation is more accurate when additions and withdrawals are relatively periodic and are not large values. The NASDAQ stock value is always not greater than 10% in reality. Therefore it is more appropriate to use the geometric mean to calculate the portfolio return. The resulting answer of portfolio return using geometric method will not always be precise. But returns that are calculated using a short timeline is more accurate if related to the ones calculated using a longer period; because the longer the period the less precise the approximation. Despite the large expansion methods of the Saga Communication Inc. they have consistently made a loss in the days shown while the C&F Corporation bank has a good strategy and the stock value shows a positive return. The concept of risk pervades through finance and this is always true of portfolio theory. The main characteristics of portfolio are the risk and return. Returns sometimes are uncertain therefore one should look at the expected return of portfolio. But it is said that the risk return of a portfolio is demonstrably different than the characteristic of the asset that make up the portfolio. The measure of returns therefore, is not only for determining the performance of the business and strategizing but also to determine the risk of the business as well. Works Cited Boyd, John H., and Ravi Jagannathan. The stock markets reaction to unemployment news: why bad news is usually good for stocks. Cambridge, MA.: National Bureau of Economic Research, 2001. Print. Market valuation of bank and S&L stocks: a comparison of Amex, NASDAQ and NYSE issues with market values under $100 million.. New York, N.Y.: American Stock Exchange, 1983. Print. Read More