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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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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)
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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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)
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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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.
Section 5)
Standard Deviation
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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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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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=5
80 =8.94
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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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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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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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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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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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Lawton, P., and Jankowski, T. (2009). Investment Performance Measurement: Evaluating and Presenting Results. New York: John Wiley and Sons.
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