SHARE MARKET INVESTMENTS

TABLE OF CONTENTS

SHARE MARKET INVESTMENTS..........................................................................................................1

1.EXECUTIVE SUMMERY.........................................................................................................................3
1.1INTRODUCTION .....................................................................................................................................4
2.TASK 1.........................................................................................................................................................5
2.1CALCULATE AVERAGE MONTHLY RETURNS.............................................................................................5
2.2CALCULATE STANDARD DEVIATION OF MONTHLY RETURNS.......................................................................6
3. TASK 2........................................................................................................................................................7
3.1CALCULATE BETA FACTOR....................................................................................................................7
3.2CALCULATE CAPITAL ASSET PRICING MODEL (CAPM)...........................................................................7
4.TASK 3.........................................................................................................................................................8
4.1EXPECTED RETURN FOR THE PORTFOLIO..................................................................................................8
4.2STANDARD DEVIATION FOR THE PORTFOLIO..............................................................................................9
4.3BETA FACTOR FOR THE PORTFOLIO.......................................................................................................10
= .869.........................................................................................................................................................10
5.TASK 4.......................................................................................................................................................10
5.1PORTFOLIO WITH ZERO STANDARD DEVIATION.......................................................................................10
6.CONCLUSION..........................................................................................................................................10
7.ANNEXURES............................................................................................................................................11
7.1 ANNEXURE 1....................................................................................................................................11
7.2 ANNEXURE II....................................................................................................................................11
7.3 ANNEXURE III..................................................................................................................................12
7.4 ANNEXURE IV..................................................................................................................................12
7.5ANNEXURE V....................................................................................................................................13
7.6ANNEXURE VI...................................................................................................................................13
8. REFERENCES ........................................................................................................................................13

1.Executive Summery
Investment in the Stock market signifies investment made by a investors in quoted
companies listed in the share market. An investor invests monies in stock market with
the hope of capital gain in the future. Stock market investments are considered purely as
a speculative one. Share traders tend to continuously watch the stock market
movements during the trading hours and in the event they find any opportunity arising
they will immediately sell the share to realize the profit. These kinds of trading
considered as high risk and are therefore not considered as traditional investments as
there is higher risk of loss than average. Generally speculators rely on the technical
analysis.
It is always better to hold a healthy share portfolio to mitigate risk in deprecating your
investment. Given below are the facts of investing in shares

Owning a share or a stock means that the company or the person is a partial
owner of the company, and thereby they get voting rights in certain company
issues.
In the long run, historically stocks have averaged about 10% annual returns
However, stocks offer no guarantee in any returns and even in the long run can
lose value.
Investments in shares generate returns through dividends.

An analytical study will be carried out by taking a share portfolio of two companies
each from two different sectors trading in US stock exchange along with S&P500 share
index to calculate monthly returns for those selected companies. Also to calculate
average monthly returns and the standard deviation on monthly returns to analyze the
shares with best returns in this portfolio.
This will$ also go on to calculate the beta factor by calculating co-variance to measure
the specific risk of the company's shares relative to the market as a whole. Also by
using capital asset pricing module to analyze the relationship between risk and expected
return and that is used in the pricing of risky securities.

1.1Introduction
S&P500 which is known as standard and poor is generally regarded as the best single
yardstick of the U.S equities markets. This world recognized index includes 500
leading companies belonging to leading industries of the US economy. Pepsi Co &
Coca Cola Cos are some of the leading companies under Consumer Staples in
S&P500. Also Google Inc & Yahoo Incs are some of Information Technology giants
listed in S&P500.
Mostly common stocks are trading in S&P500 based on the performance, economic &
political indicates. Stockholders of common stocks can expect to receive their income
in the form of capital gains and also in terms of dividends which is purely discretionary
on the part of the management of any company.
Our task is to analyze the above four companies along with S&P500 for the period of 1st
August 2006 to 31st July 2007 & calculate average monthly return, standard deviation
of monthly returns along with beta for all four companies with S&P500. Also by using
CAPM to estimate the required return of stocks based on assumptions. Finally to
analyze expected return and standard deviation and beta factor of this portfolio based on
assumptions.

2.Task 1
Calculate the monthly returns by using closing price data for Pepsi Cola Inco(PEP),
Coca Cola Co(KO), Yahoo Inc(YHOO) & Google Inc(GOOG) and S&P500 for one
year. Also to calculate the average monthly return and the standard deviation for all
four companies along with S&P500.
2.1Calculate Average Monthly Returns
Closing prices was considered for the period of 1st August 2006 to 31st July 2007 to
calculate average monthly return (Annexure 1).
To analyse the average monthly return, it is important to find out the opening market
value at the beginning of the month (Annexure II) for those selected companies along
with cash dividends (Annexure III) & the opening value of the S&P500 index.
Find below the formula to calculate the Average Monthly Return(AMR).
AMR=Dividends+(Average Monthly Stock ValueOpening Monthly stock Value)
Opening Monthly stock Value
Refer Annexure IV for the AMR for all four companies along with S&P500 by using
the above formula.
KO Average Annual Return(AAR) has increased by 22.36% and PEP AAR has only
increased by 6.80%. This has resulted due the increase in net income in KO by 19% in
3rd Quarter 2007 when compared 17% increase in PEP. From the selected companies for
Consumer Staples sector KO will give higher rate of return for the investor.
GOOG AAR has increased by 41.80% and YHOO AAR has decreased by -8.07%. This
has resulted due the increase in net income in GOOG by 46% in 3rd Quarter 2007 when
compared 12% decrease in YHOO. From the selected companies from Information
Technology sector GOOG will give a very higher rate of return for the investor whereas
YHOO will give a negative return.
Also during this period S&P500 index has steadily increased by 19.65%. By looking at
the above chart only GOOG and KO have increased with the change in S&P500 index.
This will also illustrate in arithmetic mean as well. (Arithmetic mean is frequently
called as average. Average or Mean can be defined as the sum of all given elements
divided by total number of elements)
5

Following Chart will illustrate the average monthly return of movement of each stock
and S&P500 index.

12.00
10.00
8.00
6.00
4.00
2.00
0.00
-2 . 0 0
-4 . 0 0
-6 . 0 0
-8 . 0 0

PEP
KO
YHOO
GOOG

Au
g'0
6
Se
p'0
6
Oc
t'0
6
No
v'0
6
De
c'0
6
Ja
n'0
7
Fe
b'0
7
Ma
r'0
7
Ap
r'0
7
Ma
y'0
7
Ju
n'0
7
Ju
l'07

Return Percentage

A v e ra g e M o n th ly R e tu rn P e rc e n ta g e

S & P 500

P e ri o d

2.2Calculate Standard Deviation of Monthly Returns

The standard deviation(SD) is frequently used by investors to determine the risk of a
stock or a stock portfolio. In other words SD is a measure of volatility.
The following formula is used to calculate SD(AnnexureV).
SD=Total of 12 months (Average Monthly Return(AMR)Arithmetic Mean(AR)) 2
No of Observations minus 1(N-l)
KO ended up increasing value from $ 44/- to $ 53/- (23%) & PEP from $ 63/- to $ 66/(6%) from the selected companies for Consumer staples sector. However, they clearly
differ in volatility. KO average monthly returns vary from -1.47% to 5.65% whereas
PEP vary from -2.57 to 2.91. So KO volatility (4.18%) is higher than PEP (3.98%).
Similarly GOOG ended up increasing value from $ 377/- to 532/- (41%) & YHOO by
deceasing from $ 28/- to $ 25/- (-8%) from the selected companies for Information
Technology sector. However, they also clearly differ in volatility. GOOG average
monthly returns vary from -2.33% to 9.61% whereas YHOO vary from -5.45 to 9.83.
So YHOO volatility (26.79%) is higher than GOOG(11.28%).
Also during this period S&P500 index has steadily increased from 1,287 points to 1,521
points 1(9%). S&P500 average monthly index vary from +0.001 to +3.15. Due to
constant increase in index during this period, S&P500 volatility remained very minimal
at 0.94.
So out of the total portfolio YHOO heading the volatility 26.79% followed by GOOG at
11.28%, KO at 4.18% & PEP at 3.97%.
6

3. Task 2
Next task is to calculate Beta Factor for the portfolio with S&P500 index as the market
portfolio. After finding the Beta Factor for each selected company use Credit Asset
Pricing Model to estimate the required return for the stock portfolio.

3.1Calculate Beta Factor

The Beta factor of an investment is a measurement of the regular risk of an investment.
In simple words it will measures the specific risk of the company's shares comparative
to the market sentiment. Plus (+) or minus (-) of beta factor will indicate whether, on
average, the investment returns move with or against the market direction. This will
also indicate the volatility of a particular stock.
It is important to calculate the co-variance (Annexure VI) before computing the Beta
Factor.
The following formula is used to calculate sample Co-variance.
Co-vab=Total of 12 months(AMR of aAM of a)(AMR of bAM of b)
No of Observations minus 1(N-l)
So to compute the actual Beta Factor PEP the following formula can be used
Beta Factor of PEP=Co-variance of PEP & S&P500
SD of S&P500
Beta Factor of PEP= -0.27
0.94
= - 0.29
Similarly for KO, YHOO & GOOG the beta factor computation was 0.93, -2.16 & +
0.80 respectively. This will clearly indicate that KO & GOOG investment returns will
move with the market trends & PEP & YHOO will make investment losses & will
move against the market trends.

3.2Calculate Capital Asset Pricing Model (CAPM)

CAPM will describe the connection between risk and expected return and that is used in
the pricing of risky stocks. So in other words if the expected investment returns are not
equal or higher than the required return, the investors will not invest monies in those
stocks or securities.
7

To compute the CAPM the following formula can be used

=4% (0.04)
=PEP(-0.29), KO(+0.93),YHOO(-2.16)&GOOG(0.80)
=13%(0.13)
CAPM for PEP

=0.04+(-0.29)(0.130.04)
= -0.25(0.09)
= - 2.25%

Similarly for KO, YHOO & GOOG the CAPM computation was 8.73%, -19.08 & +
7.56% respectively. All the four shares are generating less than market returns. Whereas
KO & GOOG expected returns are more than the Risk Free Rate and on the other hand
PEP & YHOO are generating losses from the investment & YHOO it self generating
more 19% loss for the portfolio.

4.Task 3
Only one company from each sector will be selected for the below calculation. KO &
GOOG is selected, since investors are making positive expected return from those
investments.

4.1Expected Return for the Portfolio

Assumptions Expected Returns=Actual Returns
KO Expected Returns=8.73%(=Actual Rate)
GOOG Expected Returns=7.56%(=Actual Rate)
Expected Portfolio Return

=(50@8.73)+(50@7.56)
100
= 8.145%

4.2Standard Deviation for the Portfolio

To calculate the SD for the portfolio the following formula to be used
______________________________
Portfolio (Two Assets) SD =

Wa a + Wb b +2 Wa Wb rab a b
2

Wa=Weight of Assets a in the portfolio

Wb=Weight of Assets b in the portfolio
a=SD of Asset a
b=SD of Asset b

rab=Correlation Coefficient of Asset a & b

Correlation Coefficient AB=Co-variance of Asset A&B
SD of Asset A* SD of AssetB
Correlation Coefficient KO, GOOG=- 1.9762
4.1892*11.2757
= - 0.0418
This shows a perfect negative correlation.
Wa=50%(.5)
Wb=50%(.5)
a=4.1892%(0.041892)
b=11.2757%(0.112757)

rab= - 0.0418
______ ____________________________________

(.5 ) (.0419 ) + .5 ) (.1127 )+2 (.5)(.5)(-.0418)(.0419)(.1127)

PSD KO/GOOG =

______ ____________________________________

0.000438903 + 0.003175323 - 0.0000986

PSD KO/GOOG =

PSD KO/GOOG=0.05929=5.929%

4.3Beta Factor for the Portfolio

The following formula is to be used to calculate the beta of the portfolio.
Portfolio Beta=50% of Beta A+50% of Beta B
Beta for KO=8.73%
Beta for GOOG=7.56%
Portfolio Beta for KO & GOOG

=.5*0.93+.5*0.80

= .869
5.Task 4
5.1Portfolio with Zero Standard Deviation
If SD of a portfolio of numbers is equal to 0 then all number in the portfolio must be
equal to the mean value of all the numbers in the portfolio.
i.e. : X*N/N=X
SD = sqrt(((n times)(each value - mean value)^2)/(n-1))or(((n times)(x-x
))
(n-1)
So if there is three numbers (x,y,z) in the portfolio
Mean value (x
)= (x+y+z)/3=(x+x+x)/3=3x/3=x
There for
sqrt(((3 times)(x-x))/(3-1))=sqrt((0+0+0)/2)=sqrt(0)=0
Based on above if all values are the same then the mean value is the same as all the
values and obviously there wont be any deviation.
6.Conclusion
The golden rule in stock market is to have an analytical study of the stock portfolio in
order to maintain a healthy portfolio to avoid undue risk of loosing money.
Prior to investing money an investor need to decide whether it is a long term or a short
term investment. It includes the risk factors & return on investments. By doing
analytical approach an investor can determine whether to invest in the share market or
in other investments such as Bank deposits, Bonds etc to maximise the return on
investments.

10

7.Annexures

7.1 Annexure 1

Month & Year

Aug'06
Sep'06
Oct'06
Nov'06
Dec'06
Jan'07
Feb'07
Mar'07
Apr'07
May'07
Jun'07
Jul'07
Arithmetic Mean

Monthly Average Stock Price

PEP
KO
YHOO
GOOG
S&P500
63.75
44.26
28.13
377.09
1,287.15
64.94
44.59
27.26
397.06
1,317.74
63.53
45.31
24.54
440.53
1,377.94
62.46
46.78
27.03
485.63
1,388.63
63.04
48.47
26.28
473.50
1,416.72
64.37
48.29
28.05
490.58
1,424.16
64.22
47.70
30.45
467.22
1,444.79
63.19
47.42
30.61
452.91
1,406.95
65.01
50.71
29.98
472.50
1,463.64
67.86
52.51
29.13
473.01
1,511.14
66.19
51.87
27.60
515.02
1,514.49
66.18
52.92
25.86
532.48
1,520.70
64.56
48.40
27.91
464.79
1,422.84

7.2 Annexure II

Date
1-Aug-06
1-Sep-06
2-Oct-06
1-Nov-06
1-Dec-06
3-Jan-07
1-Feb-07
1-Mar-07
2-Apr-07
1-May-07
1-Jun-07
2-Jul-07

Opening Market Value for the Month

PEP
KO
YHOO
GOOG
S&P500
63.17
44.31
26.94
375.51
1,270.92
65.28
44.81
28.83
378.53
1,303.82
65.26
44.68
25.28
401.90
1,335.85
63.44
46.72
26.34
476.39
1,377.94
61.97
46.83
27.01
484.81
1,400.63
62.55
48.25
25.54
460.48
1,418.30
65.24
47.88
28.31
501.50
1,438.24
63.15
46.68
30.86
449.45
1,406.82
63.56
48.00
31.29
458.16
1,420.86
66.09
52.19
28.04
471.38
1,482.37
68.33
52.99
28.70
497.91
1,530.62
64.85
52.31
27.13
522.70
1,503.35

11

7.3 Annexure III

Date
Aug'06
Sep'06
Oct'06
Nov'06
Dec'06
Jan'07
Feb'07
Mar'07
Apr'07
May'07
Jun'07
Jul'07

PEP
Nil
0.3
Nil
Nil
0.3
Nil
Nil
0.3
Nil
Nil
0.38
Nil

Monthly Dividends
KO
YHOO
Nil
0.31
Nil
Nil
0.31
Nil
Nil
0.34
Nil
Nil
0.34
Nil

GOOG
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil

Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil

7.4 Annexure IV

Month & Year

Aug'06
Sep'06
Oct'06
Nov'06
Dec'06
Jan'07
Feb'07
Mar'07
Apr'07
May'07
Jun'07
Jul'07
Arithmetic Mean
Annual Growth

Average Monthly Return Percentage

PEP
KO
YHOO
GOOG
S&P500
0.92
-0.11
4.42
0.42
1.28
-0.06
0.18
-5.45
4.89
1.07
-2.65
1.41
-2.93
9.61
3.15
-1.54
0.13
2.62
1.94
0.77
2.21
4.16
-2.70
-2.33
1.15
2.91
0.08
9.83
6.54
0.41
1.56
-0.37
7.56
6.84
0.45
0.53
2.31
-0.81
0.77
0.01
2.28
5.65
-4.19
3.13
3.01
2.68
0.61
3.89
0.35
1.94
-2.57
-1.47
-3.83
3.44
1.05
2.05
0.01
-4.68
1.87
1.15
0.69
1.05
0.31
3.12
1.29
6.80
22.36
-8.07
41.80
19.65

12

7.5Annexure V
Standard Deviation of Monthly Return Percentage
Month & Year PEP
KO
YHOO
GOOG
S&P500
Aug'06
0.0529
1.3456
16.8921
7.2900
0.0001
Sep'06
0.5625
0.7569
33.1776
3.1329
0.0484
Oct'06
11.1556
0.1296
10.4976
42.1201
3.4596
Nov'06
4.9729
0.8464
5.4747
1.3924
0.2704
Dec'06
2.3104
9.6721
9.0601
29.7025
0.0196
Jan'07
4.9284
0.9409
90.6304
11.6964
0.7744
Feb'07
0.7569
2.0164
52.5625
13.8384
0.7056
Mar'07
0.0256
1.5876
1.2544
5.5225
1.6384
Apr'07
2.5281
21.1600
20.2500
0.0001
2.9584
May'07
3.9601
0.1936
12.8164
7.6729
0.4225
Jun'07
10.6276
6.3504
17.1396
0.1024
0.0576
Jul'07
1.8496
1.0816
24.9007
1.5625
0.0196
Standard
Deviation of
Monthly
Return
3.9755
4.1892
26.7869
11.2757
0.9431

7.6Annexure VI
Covariance With regard to Sectorial Companies
Month &
Year

Covariance with S&P500

KO

PEP/
KO

YHOO

GOOG

KO/GOO
G

Aug'06

0.2267

-1.1592

-0.2627

4.1092

-2.7025

3.1326

-0.0067

-0.0015

0.0077

-0.0274

0.0180

Sep'06

-0.7533

-0.8692

0.6548

-5.7608

1.7675

-1.5363

-0.2167

0.1632

0.1883

1.2482

-0.3830

Oct'06

-3.3433

0.3608

-1.2064

-3.2408

6.4875

2.3409

1.8633

-6.2297

0.6724

-6.0388

12.0884

Nov'06

-2.2333

-0.9192

2.0528

2.3092

-1.1825

1.0869

-0.5167

1.1539

0.4749

-1.1931

0.6110

Dec'06

1.5167

3.1108

4.7181

-3.0108

-5.4525

-16.9618

-0.1367

-0.2073

-0.4251

0.4115

0.7452

Jan'07

2.2167

-0.9692

-2.1483

9.5192

3.4175

-3.3121

-0.8767

-1.9433

0.8496

-8.3451

-2.9960

Feb'07

0.8667

-1.4192

-1.2299

7.2492

3.7175

-5.2758

-0.8367

-0.7251

1.1874

-6.0651

-3.1103

Mar'07

-0.1633

1.2608

-0.2059

-1.1208

-2.3525

-2.9661

-1.2767

0.2085

-1.6097

1.4309

3.0034

Apr'07

1.5867

4.6008

7.3000

-4.5008

0.0075

0.0345

1.7233

2.7344

7.9288

-7.7564

0.0129

May'07

1.9867

-0.4392

-0.8725

3.5792

-2.7725

1.2176

0.6533

1.2980

-0.2869

2.3384

-1.8114

Jun'07

-3.2633

-2.5192

8.2209

-4.1408

0.3175

-0.7998

-0.2367

0.7723

0.5962

0.9800

-0.0751

1.3567

-1.0392

-1.4098

-4.9908

-1.2525

1.3016

-0.1367

-0.1854

0.1420

0.6821

0.1712

-0.27

0.88

-2.03

0.75

Jul'07
Covariance
%

PEP

1.4192

-1.9762

S&P500

PEP

KO

YHOO

GOOG

8. References
Details

Source
13

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from<http://files.shareholder.com/downloads/YHOO/697864510x0x163792/d27edf0c-7cd0476c-9929-2eac03454c6f/163792.pdf> [Accessed: 9th 2009].

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