Compared With The Rest Of Their Competitors In The Stock Market

Question: Discuss About Compared With the Rest of Their Competitors in the Stock Market? Answer: Introducation: Mean return is expected payoff that a security is likely to earn (Baillie, R. T 1990).The actual return may revolve around this return because this is just an expectation i.e it may be lower or higher than the expected. A company that has got higher mean is preferred than the one with the lower mean. This is because a higher mean is an indication that there is a probability that, that particular company shall earn higher returns based on data from previous periods. The mean return for Market, Inception ltd and Retract ltd is $15.7,$1.28 and $0.27.Thus between the two company, Inception limited has a higher return compared to Retract ltd and hence Inception would be highly preferred by prospective investors than its counterpart, However the two company`s returns is very low compared to market return which indicates that the two companies are performing poorly when compared with the rest of their competitors in the stock market. Standard Deviation Standard deviation is used to assess the volatility of the security return. It measure how the security`s returns is likely to deviate from the expected return. The higher the standard deviation of a security the higher the risk i.e the return is likely to vary with a high degree of magnitude from the expected return.The standard deviation for the market is 66%,Inception ltd is 6.67% and that for Retract ltd is 6%.Thus the market return is likely to vary by 66% from the expected return.The return for Inception is likely to vary by 6.67% from the expected return and for Retract is 6%.This means that inception company is riskier than Retract ltd. Coefficient Of Variation Coefficient of variation is the standard deviation divided by its mean, it is a ratio and hence unitless.It is a measure of dispersion of data and therefore describe the amount of variability relative to the mean. Inception ltd has CV of 5.2% and Retract ltd has a CV of 22.2%.This means that Retract ltd security returns are more spread from the mean than that of Inception ltd. Correlation Coefficient Correlation Coefficient shows how individual securities are related to one another. The relation can be positive or negative;. In our case the correlation coefficient between Inception and Retract ltd is 0.005 which indicates a weak positive correlation between the two securities. This means that if one of the security prices increases or decreases the other security price increases and decreases by less than proportion. Standard Deviation of A Portfolio This is the deviation from the expected return of two or more securities held together. As evident from the calculation above the standard deviation of a portfolio is 0.22% .This is lower than that of individual securities e.g. by 6.47% for Inception and 5.8% for Retract ltd. Thus holding a portfolio is by far less risky than holding individual securities. Beta Beta measures the risk of individual security that has been held together in a portfolio. It measures the responsiveness of a security to movement in the market portfolio (Black, F.1993). A beta of 1.5% as for the case of Inception ltd means that for every 1% change in the market, the inception security will likely moves 1.5%.This means that inception security is 1.5 times more volatile than the market. For Retract ltd a beta of 1.7% means that a change in 1% in the market causes the security to change by 1.7%.Thus Retract ltd security is 1.7 times as volatile as the market. References Baillie, R. T., DeGennaro, R. P. 1990. Stock Returns and Volatility. Journal of Financial and Quantitative Analysis, 25, 203-214 Black, F. (1993). Beta and return. Journal of Portfolio Management, 20, 8-18. R. MacCrimmon, D. A. Wehrung. 1986. Taking Risks: The Management of Uncertainty. New York: Free Press. Pettengill, G., Sundaram, S., Mathur, I. 1995. The Conditional Relation Beta and Returns. Journal of Financial Quantitative Analysis, 30, 101-116. Fama, E. F., MacBeth, J. 1973. Risk, return and equilibrium: Empirical tests. Journal of Political Economy, 81, 607-636