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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 organiation s!ch as "#$
%ompany and it will be by the !se of P/E ratio analysis, and standard deviation of the mean.
Table 1& "#$ %ompany's Price Earnings (atio for )**+,)**-
#ear Price Earnings (atio
)**+ 1)
)**. )*
)**/ 10
)**1 ).
)**- +1
The p!rpose is to identify and analye theoretical and to comp!te it into practical
calc!lations for identify vario!s trends e2isting in investment selection based on ris3s
e2istence to be made as per low or high n!mbers in relation. Therefore, the aim is to
!nderstand the theories and to analye it accordingly with calc!lations and graph presentation
that will enable to ma3e 4!ic3 decisions.
5y the end of research assignment, there will be analysis whether "#$ %ompany is
s!itable for investment in )**0 based on varying levels of ris3s as per comp!tations.
Therefore, this will be enabling to determine if investor sho!ld invest in several portfolios or
6!st "#$ %ompany.
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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
stoc3 that is o!tstanding in that partic!lar company. The representation of EPS is serving as
the indicator of a partic!lar company is ma3ing profit and considered as single variable that is
most important for determination of share price. The res!lts will show that if company is
ma3ing profit then they will be having larger EPS indicating more earned profit in their per
share val!e (%arrel, 7., )**8). The comp!tation of form!la shown below&
9t is possible to obtain data that will be showing EPS forecasting and the so!rces are
investment advisory firms s!ch as Standard : Poor's and ;al!e 7ine, bro3erage ho!se
research, and financial magaines s!ch as <oney, =orth, 5!siness =ee3, and >orbes or
investors comp!te it by themselves (?irt, @., 5loc3, S., )**.).
Section 3) Price Earnings Ratio (P/E)
The comparison in P/E ratio is with the mar3et val!e per share divided by earnings
per share. The meas!ring is of relative val!e that will be indicating whether the f!t!re earning
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Portfolio Management Research
Assignment
will be growth or decline (7asher, =., )**-). Therefore, it is very !sef!l calc!lation for
finding whether to ma3e investment in partic!lar company.
P/E ratio represents stoc3's price per share to the stoc3's earnings per share. The lower
the P/E ratio is then the most attractive the stoc3 will be for investors (@ibson, %., )**0).
S!ch P/E ratio setting are by the investors where bidding price down or !p with earnings
relation. The factors that is affecting P/E ratio are economy's growth prospects, stoc3
mar3et's overall condition, historical analysis, EPS e2pected growth, EPS investor
e2pectations, and inflation related in reversely s!ch as P/E ratio rises when %P9 declines or
P/E ratio falls down when %P9 is !p (%hisholm, A., )**8).
The ratio analysis is different when eval!ating individ!al stoc3s and it incl!des
analysis of growth prospect, f!t!re performance (ris3s associated), and debt to e4!ity ratio. 9n
growth prospect, it shows that when the investor e2pectation is higher growth rate then P/E
ratio will be higher too. =hile forecasting f!t!re performance, the infl!encing factors are
when firm is having less debt representing higher val!e of stoc3 in mar3etplace. Therefore, in
high P/E ratio, the e2pectations will be positive in f!t!re and similarly declining of
e2pectations when there is low P/E ratio (?irt, @., 5loc3, S., )**.).
Section 4) P/E Ratio Analysis
According to fig!re 1, it shows that "#$ %ompany has good f!t!re performance and
there is low ris3. Therefore, the recommendation is that investors have the opport!nity to
ma3e an investment in "#$ %ompany. 9n )**+,)**., there is growth in P/E ratio b!t slight
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Portfolio Management Research
Assignment
decline after this period in )**/. ?owever, "#$ %ompany has three periodicals representing
P/E ratio growth that is pro6ecting good f!t!re performance. 9f there are chances for decline
then it will be very low ris3 b!t higher ret!rns in the f!t!re.
Accordingly, higher P/E ratios d!ring )**1,)**- represents as improvement period
from )**/ that is attractive investment with positive e2pectations. The observation is that the
slope is moving !pward trend for "#$ %ompany, which is positive and attractive n!mber in
relation with investment.
>ig!re 1& "#$ %ompany's Price Earnings (atio from )**+ to )**-
Section 5) Standard Deiation
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Portfolio Management Research
Assignment
Standard Beviation comp!tation for "#$ %ompany done is in table ) (Easy
%alc!lation, )*1*). The comp!tation consists of mean, variance, and standard deviation
calc!lation by the !se of online calc!lation steps and e2cel sheet for a!tomation.
Table )& "#$ %ompany's Standard Beviation %omp!tation )**+,)**-
%omp!tation >orm!la %omp!tation
n C!mber of val!es / Total n!mber
of val!es
D /
<ean
E2i / n
1)F)*F10F).F+1 / /
D ))
E2cel %omp!tation showing detailed calc!lation&
#ear Price Earnings (atio (") ",< ",<G
)**+ 1) (1),))) D ,1* (1*G) D 1**
)**. )* ,) .
)**/ 10 ,. 11
)**1 ). ) .
)**- +1 1. 181
E (",<)G +)*
;ariance and Standard
Beviation
D +)* / .
D 0*
DH0*
D 0.8.
Section !) Standard Deiation Analysis
Standard deviation represents the distrib!tion's variability aro!nd mean and it is the
variance's s4!are root (Siegel, A., )*11). S!ch comp!tation helps investors in the
determination of whether investment potentiality will tend to decline or pro6ect growth.
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Portfolio Management Research
Assignment
7awton, P., and Ian3ows3i, T., )**8, states that when there is higher standard
deviation the band will be wider where portfolio ris3 meas!ring ta3es place. The larger the
val!es of standard deviation will be then the greater ris3s involved.
Accordingly, the investor ma3es investment only in "#$ %ompany then ris3
relevancy will be in relation to single stoc3 investment consisted in respective portfolio of the
investment. ?owever, we shall determine based on related years showing variance to
standard deviation analysis for the given portfolio in table + for each periodical times. The
representation will be whether "#$ %ompany is !nder spending that is less than planned
spending showing positive variance and standard deviation or vice versa.
Table +& Standard Beviation Analysis on #early 5asis
#ear P/E (atio %omp!tation ;ariance Standard Beviation
)**+ 1) , , ,
)**. )*
C D )
< D 1)F)*/)D11
",<G
(1),11)GD 11
()*,11)GD 11
E",<GD
D+)/ 1
D+)
H+)
D/.1/
)**/ 10
C D +
< D 1)F)*F10/+D 11.1-
",<G
(1),11.1-)GD )1.0*
()*,11.1-)GD 11.*0
(10,11.1-)GD 1.--
E",<GD +..1/
D+..1// )
D1-.+)/
H1-.+)/
D..11
XYZ Company is under spending because standard deviation is below than previous year.
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Portfolio Management Research
Assignment
Due to this reason, there is decline in 2005.
Table +& Standard Beviation Analysis on #early 5asis (contin!edJ)
#ear P/E (atio %omp!tation ;ariance Standard Beviation
)**1 ).
C D .
< D 1)F)*F10F)./.D10./
",<G
(1),10./)GD .).)/
()*,10./)GD ).)/
(10,10./)GD *.)/
().,10./)GD+*.)/
E",<GD-/
D-// +
D)/
H)/
D/
)**- +1
C D /
< D 1)F)*F10F).F+1//D))
",<G
(1),)))GD 1**
()*,)))GD .
(10,)))GD 11
().,)))GD.
(+1,)))GD181
E",<GD+)*
D+)*/ .
D0*
H0*
D0.8.
During 200 and 200!, there is big di""erence and it shows that XYZ Company did over
spending than usual. #his puts the position o" the investment at $uestion whether
investment was "or improvement or there were loss to cover it. %oreover, it is
$uestionable whether there are possibilities and reserves "or ne&t year development and
improvement that will create good mar'etplace.
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Portfolio Management Research
Assignment
Standard deviation of the mean c!rve will help !s determine where the slope will be
moving toward in )**0. Bowd, K., )**/, states that positive c!rve s3ewing will represent
and indicate as good year for investors while negative c!rve s3ewing will represent and
indicate as loss. The investor sho!ld select portfolio that will be ma2imiing e2pected ret!rn
with minimied ris3s.
Accordingly, the lower the standard deviation will be then the lower will be the ris3
for loss. 9n )**-, the standard deviation is higher than previo!s year showing difference of
+.8. so higher the standard deviation then the ris3 will be higher. %!rve shown in fig!re )
and fig!re + will be directing whether it will be loss or profit in the following year.
>ig!re )& Standard Beviation of the <ean (All the 5!siness, )*11)
>ig!re +& Standard Beviation of the <ean %!rves (All the 5!siness, )*11)
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Portfolio Management Research
Assignment
According to fig!re ., we can see that "#$'s %ompany is showing slightly negative
s3ewing c!rve. =here, standard deviation of the mean is standing from ,1 to F). This shows
that there are higher and greater chances for negative o!tcome in )**0 rather than positive
res!lts.
Therefore, if there is investment ma3ing then gains will be small and losses will be
e2tremely high. The indication is that high probability of negativity is 0*L loss and this
indicates that profit or gain will be only )*L that is not attractive. S!ch indication shows that
"#$ %ompany's portfolio will not have paybac3 for any degree of profit for any amo!nt of
investment b!t there will high loss with high ris3s and low ret!rns or profit for investors.
>ig!re .& "#$ %ompany's Standard Beviation of the <ean %!rve )**+ to )**0 (%alifornia
State Mniversity, )*11)
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Portfolio Management Research
Assignment
Section ") #onclusion
9n concl!sion, 9 have learned a lot from portfolio management research assignment. 9t
shows that P/E ratio is not eno!gh for analying whether there will be profit opport!nity from
investment b!t there is need for several portfolio analyses for findings analysis. 5ased on the
historical data of "#$ %ompany, it shows that it is not s!itable to ma3e investment in )**0
and it will not be a good year for investors d!e to high standard deviation of the mean and
negative c!rve.
There are several factors that is indicating possibilities for being not attractive even
tho!gh there is P/E ratio beca!se standard deviation of the mean shows high differences
d!ring )**1 and )**- that is proving that "#$ %ompany&
<ade h!ge investment for improving c!rrent stat!s of company in )**1,)**-
and limited investment for the following year )**0,
7oaned to f!nd their b!siness f!nctions and activities where year )**0 and
later might be years for paying bac3 these debts,
(is3ing f!t!re reserves and profits to improve c!rrent profitability, and
Nver spending, that affects f!t!re improvement potentials and needs.
The recommendation is that investor sho!ld not ma3e investment d!e to high
possibilities of ris3 and no opport!nity for profit. The investor sho!ld start loo3ing for
another portfolio that is possessing high probabilities of positive o!tcome and low ris3 level.
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Portfolio Management Research
Assignment
Section $) %i&liogra'hy
All the 5!siness. ()*11). (tandard Deviation o" the %ean. (etrieved April -, )*11 from
http&//www.allb!siness.com/glossaries/normal,distrib!tion/.8.0))+,1.html
%alifornia State Mniversity. ()*11). (tandard Deviation ) *ormal Distribution Calculator.
(etrieved April -, )*11 from
http&//www.math.cs!sb.ed!/fac!lty/stanton/probstat/normalOdistrib!tion.html
%arrel, 7. ()**8). Dividend (toc's "or Dummies. Cew #or3& >or B!mmies.
%hisholm, A. ()**8). +n ,ntroduction #o ,nternational Capital %ar'ets- .roducts, (trategies,
.articipants. Cew #or3& Iohn =iley and Sons.
Bowd, K. ()**/). %easuring %ar'et /is'. Cew #or3& Iohn =iley and Sons.
Easy %alc!lation. ()*1*). (tandard Deviation 0 Calculator. (etrieved April -, )*11 from
http&//easycalc!lation.com/statistics/standard,deviation.php
@ibson, %. ()**0). 1inancial /eporting and +nalysis 23oo' 4nly5. Cew #or3& %engage
7earning.
?irt, @., 5loc3, S. ()**.). %anaging ,nvestments. Cew #or3& <c@raw,?ill Professional.
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Portfolio Management Research
Assignment
7asher, =. ()**-). .ractical 1inancial %anagement. Cew #or3& %engage 7earning.
7awton, P., and Ian3ows3i, T. ()**8). ,nvestment .er"ormance %easurement- 6valuating
and .resenting /esults. Cew #or3& Iohn =iley and Sons.
Siegel, A. ()*11). .ractical 3usiness (tatistics. Cew #or3& Academic Press.
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