Diversified Risk Stock Portfolio
Create a portfolio of five to eight stocks that demonstrate diversified risk. List the stocks along with their current price and previous 1-year and 5-year rates of return. Below the list of stocks, address the issues described below.
Explain the difference between portfolio risk and stand-alone risk.
Briefly explain why you selected each stock and how this investment portfolio would have less risk than selecting just one stock.
How does risk aversion affect a stock’s required rate of return?
Explain the distinction between a stock’s price and its intrinsic value.
Portfolio risk refers to the risk of an entire portfolio as opposed to stand alone risk which is the risk associated with a single stock or other security within a portfolio or investment strategy based on historical market performance and probability analysis over a given time period such as one year or five years in this case .Portfolio risk considers the volatility of each individual stock within the portfolio relative to overall market movements and combines them into a collective measurement – diversification reduces that overall level of volatility by spreading out investments across multiple securities in different sectors and industries with varying levels of correlation so that if one sector suffers losses due to macroeconomic factors then those losses can be absorbed by higher gains in another sector since they won’t all move together in lockstep . Therefore when selecting my stock picks for this portfolio I attempted to spread out my investments across different sectors including technology , telecommunications , banking , healthcare/pharmaceuticals and consumer goods/services so that any potential losses from one area can be offset by gains elsewhere for less overall risk than investing solely in one sector or company . Additionally each stock was chosen based on their current price as well as their past year and five year rates of returns which were high enough indicating reliable long term growth potential .
Risk aversion affects a stock’s required rate of return because investors prefer lower volatility when it comes to picking stocks in order to minimize their chances at suffering big losses due to market fluctuations while still taking advantage of moderate upside potential so they look for stocks with steady track records and consistent dividends along with reasonable prices before investing even if that means foregoing higher returns offered by other more volatile stocks since no investor wants to take on unnecessary risks without corresponding rewards especially when it comes down protecting their finances over the long run thus companies offering relatively low but stable returns will have higher demand since they appeal more favorably among conservative investors who prioritize consistency over rapid growth ; thereby raising their share prices without drastic price swings resulting in higher required rates of returns thanks largely to increased demand generated by these types savvy investors .
The distinction between a stock’s price and its intrinsic value lies primarily in how each figure is determined ; whereas an intrinsic value is determined through fundamental analysis such as cash flow statements net income calculations dividend yield etc.. A stock’s price however reflects what someone else has established its worth is whether through speculation or supply/demand related dynamics usually arising from news events short selling bearish forecasts media attention etc… As such there is often much variability between what an individual thinks something should cost versus how much others are willing pay for it resulting various discrepancy between actual trade activity prices set through fundamental variables inherent within the financial health organization issuing said security; making it important recognize this difference especially during times elevated sentiment surrounding certain equities might lead people overestimate some assets regardless underlying fundamentals actually driving performance