Risk & Return, CAPM Analysis for Dow Jones Industrial Average and its banking and IT components.

1. PORTFOLIO ANALYSIS:
Asmik Akhverdyan
Ruzanna Ayvazyan
Davit Matevosyan
Mariam Petrosyan
Marina Sedrakyan 1
Dow jones IT and Banking componentsDow jones IT and Banking components
Prof. Grigoryan

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5. Risk represents
uncertainty of a return and
the potential for financial
loss.
Measures of risk:
•Range
•Mean absolute deviation
•Variance (standard deviation)
•Coefficient of variation
Return on an investment
is the financial outcome
for the investor.
An investment’s distribution
of returns follows a normal
distribution
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Assets with higher return are always riskier

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8. • Diversifiable Risk versus Market Risk
/Systematic and Unsystematic Risks/
• Market Risk: Beta Risk
• Other Risks
8

9. Beginning with one stock and adding
randomly selected stocks to portfolio
• Diversifiable risk decreases as stocks added,
because they would not be perfectly
correlated with the existing portfolio.
• Expected return of the portfolio would remain
relatively constant.
• Eventually the diversification benefits of
adding more stocks dissipates (after about
10 stocks)
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Stand-alone risk = Market risk +
Diversifiable risk
• Market risk – portion of a stock’s stand-
alone risk that cannot be eliminated
through diversification. Measured by
beta.
• Diversifiable risk – portion of a stock’s
stand-alone risk that can be eliminated
through proper diversification.

11. # Stocks in Portfolio
10 20 30 40 2,000+
Diversifiable Risk
Market Risk
20
0
Stand-Alone Risk, σp
σp (%)
35
Diversification effects of a stock portfolio
11

12. Other Risks
• Different currency denominations
• Political risk
• Economic and legal ramifications
• Role of governments
• Language and cultural differences
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• Why do investors prefer portfolios?
• What is a feasible portfolio?
• What is an optimal portfolio?

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• Second oldest stock index
• Price-weighted average
• Includes 30 components
• The components are selected by the WSJ

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Regression Statistics for IT
Multiple R 0,79184
R Square 0,627011
Adjusted R Square 0,623991
Standard Error 0,004165
Observations 251
Regression Statistics for Banking
Multiple R 0,392918115
R Square 0,154384645
Adjusted R Square 0,147565166
Standard Error 0,00616765
Observations 251
Regression Statistics for HP
Multiple R 0,288077233
R Square 0,082988492
Adjusted R Square 0,075563298
Standard Error 0,006530247
Observations 251
DJ=0,0027-0,003*i-0,001WRDJ=-0,566+0,129*i +0,665*WR
DJ=-0,3287+0,085*i+0,161*HR

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Coefficients Standard Error t Stat P-value Lower 95% Upper 95%
Intercept 0,0027154 0,0019136 1,419025013 0,1571473 -0,0010535 0,0064845
i -0,0031343 0,0004778 -6,55884033 3,13175E-10 -0,004076 -0,002193
WR -0,0010849 0,0012583 0,862237592 0,03893898 -0,0035632 0,0139335
Coefficients Standard Error t Stat P-value Lower 95% Upper 95%
Intercept -0,5658546 0,130166769 -4,3471511 2,02E-05 -0,822233 -0,30948
i 0,1290238 0,08489222 1,51985399 0,129827 -0,038182 0,296229
WR 0,6648816 0,032822503 2,25688175 2,03E-54 0,600234 0,729529
Coefficients Standard Error t Stat P-value Lower 95% Upper 95%
Intercept -0,3287197 0,203257181 -1,61726 0,107099 -0,7290581 0,071618637
i 0,0847991 0,018788707 4,513298 9,88E-06 0,0047792 0,0121805
HR 0,161222659 0,133158229 1,21076 0,022714 -0,0101048 0,0423497

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Root Mean Squared Error 0.4
Theil Inequality Coefficient 0.32

24. 2
m
im
i
σ
σβ =
- co-variation of stock and market
- coefficient of dispersion of market return
> 1, stock is more risky
< 1, less sensitive to market changes
= 1, the same risk level as the market
imσ
β
β
2
mσ
β
Measure of the risk contribution of an individual
security to a well-diversified portfolio.
24

25. Markowitz’s Portfolio theory
Sharp, Treynor…
R=Rf + β*(RM-Rf)
RM= Rf + Risk premium
R is the expected return on
security,
Rf is the risk free rate
β is beta of the security
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26. WR=0.009*RP
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R-Squared 62.3%
Coefficient β 0.009
P-value (Sig. t) 0.0000 < 0.05
P-value

27. Weighted
banking=0.004*RP
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R-Squared 14.9%
Coefficient β 0.004
P-value (Sig. t) 0.0000 < 0.05
P-value

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29. 29P-values for all the regressions were < 0.05 which means
H0 is rejected and Ha is accepted.

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Sharp Ratio Treynor Ratio
IT Banking
Sharp 0.58 0.21
Treynor 51 43
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