Portfolio 1

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Introduction

In today's business world, possible opportunities are limited in the capital markets.

However, a potential return in your investments and risks cannot be examined alone. For an

investor to minimize risks on investments, they will be required to invest in various types of

stocks by building a portfolio that employs increased stock with the expected rate of return.

In coming up with a good portfolio, relative valuation is applied to this effect, as it is simple,

timely, and with minimal presumptions. Furthermore, the essential data needed for the relative

valuation are often accessible. Similarly, when building a solid stock portfolio, the investment

concept must establish the market entry time and exit to achieve maximum results while

minimizing risks.

For our case, four stocks opportunities have been chosen, i.e., Amazon, FTSE Company,

Square Company, Roku, and Pin interest. Over the previous months, the companies have been

performing financially well and will form the basis of our stock portfolio. Once the portfolio is

constructed, there has to be a performance evaluation. In addition to building a stock portfolio, it

is also essential to develop ways for portfolio diversification.

This paper aims to determine portfolio simulation results by applying relative ratio approaches.

The portfolios are further built based on provided financial reports.

Expected return on a portfolio

The total investment capital is worth $100000, and the number of stocks at our disposal is

5. This implies that each stock in the portfolio would be;

100000/5=20000, distributed equally. Therefore, the asset’s weight in the portfolio would be

20000/100000 *100000= 20% or 0.2

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For our case, the projected rates of return on the stocks are as follows;

FTSE-6%

AMAZON INC- 7%

SQUARE- 10%

ROKU- 15%

PINTEREST-11%

Since we know the value of the portfolio and each stock’s rate of return, then the

expected rate of return portfolio will be computed as follows;

(R1*W1) + (R2*W2) + …Rn*Wn, where R represents the rate of return and W represents the

weight of the stock in the portfolio

(0.06*0.2)+ (0.07*0.2) + (0.10*0.2) + (0.15*0.2) + (0.11*0.2) = 0.098

The expected rate of return will thus be 9.8%

The expected rate of return will imply crucial gains posted by nearly one-third of our portfolio

stock. With an anticipated rate of return on portfolio on the investment to be 9.8%, then our

value at the end of the simulation will be 100000+9800= 109800.

Looking at our stock, only the FTSE Company had a dividend yield of 2.699 %, added at

the end of the simulation. Therefore the return dividend yield on FTSE Company will be;

2.699%*20000(amount invested on that stock alone) =539.8

This is then added to our current value plus the return on investment, i.e;

539.8+100000+9800=$110339.8

Therefore the value of stock at the end of simulation will be $110339.8

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TABLE 1

Name Dividend EPS($) P/E ratio Div payout Ranking Current

Yield ratio share

price($)

FTSE 2.699% 0.00 16.80 65% 4 45.82

Amazon 0.00% 51.14 67.30 0.00% 1 3444.24

Square 0.00% 26.7 190.66 0.00% 3 181.32

Roku 0.00% 2.09 109.70 0.00% 2 240.0

Pinterest 0.00% $3.24 189.56 0.00% N 37.26

Investors are often confused about picking the best long-term stock expectations in a

business venture. To successfully invest in the long run, an investor should identify their long-

term goals and further analyses the particular indicators that will be crucial in the overall

investment objectives. There exist strategies that can be employed to find a good investment.

For our case, Amazon comes top as the best long-term prospect. The reason for this can

be seen due to several reasons. Firstly, the business has a high P/E ratio. By looking at this, we

can establish whether the stock is undervalued or overvalued. A business with a high P/E ratio

means that investors are in a position to pay for such incomes.

Secondly, the company has a high share price. Share prices indicate whether a company’s

earnings are favorable. For the case of Amazon, looking at its previous and current earnings,
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there has been a gradual and consistent rise in revenues. This is an excellent indicator of whether

the stock is a worthy long-term prospect.

Therefore, Amazon would be an excellent pick for a long-term prospect due to the below

reasons.

 High P/E ratio

 High share price

 Consistent income

 Lower debt ratio.

On the other hand, Pinterest becomes the worst long-term prospect as it relatively fails to

adhere to the above factors. For instance, its share price is relatively low compared to that of

Amazon. The ranking on the stocks will be based on each stock’s share price at the current

market, looking at the 5 stocks; Amazon has the highest share price followed by Roku, Square

and finally Pinterest. A higher share price depicts an organizations overall financial stability,

thus for our case, Amazon becomes the most financial stable while Pinterest the least. Hence it’s

best to invest in Amazon.

Diversification of portfolio

With diversification, a business can increase profits while decreasing overall risk. Capital

must be distributed across various investments opportunities to have a good investment portfolio.

For our case, the portfolio is diversified. Nonetheless, it is crucial to building an even more

diversified portfolio with growth.

The diversification of a portfolio is an idea that objectifies complementarities. Here, it is

vital to establish how your stock moves in different directions and particular events but still

complements one another in the end.

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By having investments that complement one another, the risk profile for the portfolio is

minimized. This is further with disregard to the assets comprised in the portfolio. To achieve

good portfolio diversification, specific strategies can be employed—for example, diversification

of stock, global market diversification, and asset category diversification.

The share price will be calculated using the P/E ratio for our case. To get the ratio, the

current share price is divided by the price to earnings per share;

In other words, P/E ratio= market value price per share/ company earnings per share. In the

previous year, the share price of the stock for Amazon increased from $3285.04 to $3444.24.

When the stock was $3285.04, the earnings per share were $51.12. Therefore, to calculate the

P/E ratio, we compute as follows;

3284.04/51.12= 64.26

Looking at our previous table, it can be seen that this ratio has increased to 67.30. This ratio is

still high, which makes the share price high.

Conclusion

Building a strong stock portfolio is essential to all investors. Stock portfolios are aimed at

ensuring that investors get the most out of their investments. As a result, they are tasked with the

responsibility of constructing stock portfolios that will achieve such objectives. From our

findings, it is thus essential to ensure that there is always portfolio diversification to protect

businesses from risks. Furthermore, it implies that increasing the number of stocks in the

portfolio can diversify an investor's substantial amount of risks.