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# Portfolio Management Research Assignment

Section 1) Introduction

The concepts that portfolio management research assignment will cover are earnings per share (EPS) and price earnings ratio (P/E ratio), and standard deviation of the mean. The portfolio analysis for data shown in table 1 for hypothetical organization such as XYZ Company and it will be by the use of P/E ratio analysis, and standard deviation of the mean. Table 1: XYZ Companys Price Earnings Ratio for 2003-2007 Year Price Earnings Ratio 2003 12 2004 20 2005 18 2006 24 2007 36 The purpose is to identify and analyze theoretical and to compute it into practical calculations for identify various trends existing in investment selection based on risks existence to be made as per low or high numbers in relation. Therefore, the aim is to understand the theories and to analyze it accordingly with calculations and graph presentation that will enable to make quick decisions.

By the end of research assignment, there will be analysis whether XYZ Company is suitable for investment in 2008 based on varying levels of risks as per computations. Therefore, this will be enabling to determine if investor should invest in several portfolios or just XYZ Company.

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## Portfolio Management Research Assignment

Section 2) Earnings Per Share (EPS)

EPS represents the portion of profit that is in allocation for each share of common stock that is outstanding in that particular company. The representation of EPS is serving as the indicator of a particular company is making profit and considered as single variable that is most important for determination of share price. The results will show that if company is making profit then they will be having larger EPS indicating more earned profit in their per share value (Carrel, L., 2009). The computation of formula shown below:

It is possible to obtain data that will be showing EPS forecasting and the sources are investment advisory firms such as Standard & Poors and Value Line, brokerage house research, and financial magazines such as Money, Worth, Business Week, and Forbes or investors compute it by themselves (Hirt, G., Block, S., 2004).

Section 3)

## Price Earnings Ratio (P/E)

The comparison in P/E ratio is with the market value per share divided by earnings per share. The measuring is of relative value that will be indicating whether the future earning

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## Portfolio Management Research Assignment

will be growth or decline (Lasher, W., 2007). Therefore, it is very useful calculation for finding whether to make investment in particular company.

P/E ratio represents stocks price per share to the stocks earnings per share. The lower the P/E ratio is then the most attractive the stock will be for investors (Gibson, C., 2008). Such P/E ratio setting are by the investors where bidding price down or up with earnings relation. The factors that is affecting P/E ratio are economys growth prospects, stock markets overall condition, historical analysis, EPS expected growth, EPS investor expectations, and inflation related in reversely such as P/E ratio rises when CPI declines or P/E ratio falls down when CPI is up (Chisholm, A., 2009).

The ratio analysis is different when evaluating individual stocks and it includes analysis of growth prospect, future performance (risks associated), and debt to equity ratio. In growth prospect, it shows that when the investor expectation is higher growth rate then P/E ratio will be higher too. While forecasting future performance, the influencing factors are when firm is having less debt representing higher value of stock in marketplace. Therefore, in high P/E ratio, the expectations will be positive in future and similarly declining of expectations when there is low P/E ratio (Hirt, G., Block, S., 2004).

Section 4)

## P/E Ratio Analysis

According to figure 1, it shows that XYZ Company has good future performance and there is low risk. Therefore, the recommendation is that investors have the opportunity to make an investment in XYZ Company. In 2003-2004, there is growth in P/E ratio but slight

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## Portfolio Management Research Assignment

decline after this period in 2005. However, XYZ Company has three periodicals representing P/E ratio growth that is projecting good future performance. If there are chances for decline then it will be very low risk but higher returns in the future.

Accordingly, higher P/E ratios during 2006-2007 represents as improvement period from 2005 that is attractive investment with positive expectations. The observation is that the slope is moving upward trend for XYZ Company, which is positive and attractive number in relation with investment.

## Figure 1: XYZ Companys Price Earnings Ratio from 2003 to 2007

Section 5)

Standard Deviation

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## Portfolio Management Research Assignment

Standard Deviation computation for XYZ Company done is in table 2 (Easy Calculation, 2010). The computation consists of mean, variance, and standard deviation calculation by the use of online calculation steps and excel sheet for automation.

n Mean

Table 2: XYZ Companys Standard Deviation Computation 2003-2007 Computation Formula Computation Number of values / Total number = 5 of values

xi / n

12+20+18+24+36 / 5 = 22

Excel Computation showing detailed calculation: Year 200 3 200 4 200 5 200 6 200 7 Variance Deviation and Standard Price Earnings Ratio (X) 12 20 18 24 36 X-M (12-22) = -10 -2 -4 2 14 X-M (10) = 100 4 16 4 196

Section 6)

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## Portfolio Management Research Assignment

Standard deviation represents the distributions variability around mean and it is the variances square root (Siegel, A., 2011). Such computation helps investors in the determination of whether investment potentiality will tend to decline or project growth.

Lawton, P., and Jankowski, T., 2009, states that when there is higher standard deviation the band will be wider where portfolio risk measuring takes place. The larger the values of standard deviation will be then the greater risks involved. Accordingly, the investor makes investment only in XYZ Company then risk relevancy will be in relation to single stock investment consisted in respective portfolio of the investment. However, we shall determine based on related years showing variance to standard deviation analysis for the given portfolio in table 3 for each periodical times. The representation will be whether XYZ Company is under spending that is less than planned spending showing positive variance and standard deviation or vice versa. Year 2003 Table 3: Standard Deviation Analysis on Yearly Basis P/E Ratio Computation Variance Standard Deviation 12 N=2 =32/ 1 32 M = 12+20/2=16 X-M 2004 20 (12-16)= 16 (20-16)= 16 2005 18 X-M= N=3 M = 12+20+18/3= 16.67 X-M (12-16.67)= 21.80 =34.65/ 2 =17.325 =32

=5.65

17.325 =4.16

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## Portfolio Management Research Assignment

(20-16.67)= 11.08 (18-16.67)= 1.77 X-M= 34.65 XYZ Company is under spending because standard deviation is below than previous year. Due to this reason, there is decline in 2005. Table 3: Standard Deviation Analysis on Yearly Basis (continued) Year P/E Ratio Computation Variance Standard Deviation N=4 =75/ 3 25 M = 12+20+18+24/4=18.5 X-M (12-18.5)= 42.25 2006 24 (20-18.5)= 2.25 (18-18.5)= 0.25 (24-18.5)=30.25 X-M=75 N=5 M = 12+20+18+24+36/5=22 X-M (12-22)= 100 2007 36 (20-22)= 4 (18-22)= 16 (24-22)=4 (36-22)=196 X-M=320 During 2006 and 2007, there is big difference and it shows that XYZ Company did over spending than usual. This puts the position of the investment at question whether investment was for improvement or there were loss to cover it. Moreover, it is =320/ 4 =80 =25

=5

80 =8.94

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## Portfolio Management Research Assignment

questionable whether there are possibilities and reserves for next year development and improvement that will create good marketplace.

Standard deviation of the mean curve will help us determine where the slope will be moving toward in 2008. Dowd, K., 2005, states that positive curve skewing will represent and indicate as good year for investors while negative curve skewing will represent and indicate as loss. The investor should select portfolio that will be maximizing expected return with minimized risks.

Accordingly, the lower the standard deviation will be then the lower will be the risk for loss. In 2007, the standard deviation is higher than previous year showing difference of 3.94 so higher the standard deviation then the risk will be higher. Curve shown in figure 2 and figure 3 will be directing whether it will be loss or profit in the following year.

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## Portfolio Management Research Assignment

Figure 3: Standard Deviation of the Mean Curves (All the Business, 2011)

According to figure 4, we can see that XYZs Company is showing slightly negative skewing curve. Where, standard deviation of the mean is standing from -1 to +2. This shows that there are higher and greater chances for negative outcome in 2008 rather than positive results.

Therefore, if there is investment making then gains will be small and losses will be extremely high. The indication is that high probability of negativity is 80% loss and this indicates that profit or gain will be only 20% that is not attractive. Such indication shows that XYZ Companys portfolio will not have payback for any degree of profit for any amount of investment but there will high loss with high risks and low returns or profit for investors.

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## Portfolio Management Research Assignment

Figure 4: XYZ Companys Standard Deviation of the Mean Curve 2003 to 2008 (California State University, 2011)

Section 7)

Conclusion

In conclusion, I have learned a lot from portfolio management research assignment. It shows that P/E ratio is not enough for analyzing whether there will be profit opportunity from investment but there is need for several portfolio analyses for findings analysis. Based on the historical data of XYZ Company, it shows that it is not suitable to make investment in 2008 and it will not be a good year for investors due to high standard deviation of the mean and negative curve.

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## Portfolio Management Research Assignment

There are several factors that is indicating possibilities for being not attractive even though there is P/E ratio because standard deviation of the mean shows high differences during 2006 and 2007 that is proving that XYZ Company:

Made huge investment for improving current status of company in 2006-2007 and limited investment for the following year 2008,

Loaned to fund their business functions and activities where year 2008 and later might be years for paying back these debts,

Risking future reserves and profits to improve current profitability, and Over spending, that affects future improvement potentials and needs.

The recommendation is that investor should not make investment due to high possibilities of risk and no opportunity for profit. The investor should start looking for another portfolio that is possessing high probabilities of positive outcome and low risk level.

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## Portfolio Management Research Assignment

Section 8) Bibliography

All the Business. (2011). Standard Deviation of the Mean. Retrieved April 7, 2011 from http://www.allbusiness.com/glossaries/normal-distribution/4948223-1.html

California State University. (2011). Standard Deviation Normal Distribution Calculator. Retrieved April 7, 2011 from

http://www.math.csusb.edu/faculty/stanton/probstat/normal_distribution.html

Carrel, L. (2009). Dividend Stocks for Dummies. New York: For Dummies.

Chisholm, A. (2009). An Introduction To International Capital Markets: Products, Strategies, Participants. New York: John Wiley and Sons.

Dowd, K. (2005). Measuring Market Risk. New York: John Wiley and Sons.

Easy Calculation. (2010). Standard Deviation - Calculator. Retrieved April 7, 2011 from http://easycalculation.com/statistics/standard-deviation.php

Gibson, C. (2008). Financial Reporting and Analysis (Book Only). New York: Cengage Learning.

Hirt, G., Block, S. (2004). Managing Investments. New York: McGraw-Hill Professional.

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## Portfolio Management Research Assignment

Lasher, W. (2007). Practical Financial Management. New York: Cengage Learning.

Lawton, P., and Jankowski, T. (2009). Investment Performance Measurement: Evaluating and Presenting Results. New York: John Wiley and Sons.

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## Portfolio Management Research Assignment

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