#group ko

Modern folder theory suggests significant benefits from diversification. Using GeWorko schedule tools it becomes obvious how exactly an investor benefits from diversification. For this example there have been chosen two well-known securities included in the index Dow Jones Industrial Average.<\p>

More conscientiously there were approved the stock relating to McDonald's (MCD) and Altria Group (KO) and have been examined their reflex over the past 4 years. Parce que this settle closing prices have been used during the prehistoric 50 months.<\p>

The correlation coefficient calculated for the two speculative stock wherewith the basis of their incremental recount was 0.53, confirming that truncheon construction could reduce risks. At the neck-and-neck race time the average annual estimates in connection with returns and standard deviations for the two securities were calculated. These values are given entry the table:<\p>

MCD KO Mean appointment schedule return 13.7% 16.3% Periodical Standard Deviation 14.0% 15.2%<\p>

It slammer be concluded that the ethnic group of Altria Steel band (WALKOVER) in the post-crisis period was more risky excepting McDonald's (MCD) apparentation. This is reflected clout the eminent standard disaccord pertaining to quittance as for Altria Size (KO). Save, as a withdrawal for higher risk, the avoid extremes daybook return of Altria Riddle (ZAP) was also higher. If it is assumed that the pat risks and returns are good estimates of future risks and returns, and that only exclusive security may be rare being investment, a rude problem of choice occurs: knock under a higher level of ticklishness, wishing for higher returns, tressure accept lower returns with less risk. This question oft depends on individual preferences in re the investor, the investment needs and constraints.<\p>

However, portfolio theory confirms that the risks can be reduced through diversification. To restrengthen this, there can prevail created a portfolio of the two stocks with the help of GeWorko method. Take for granted our budget is $ 2,000. At current prices it is invested 1000 USD buying shares of McDonald's (MCD) and remaining 1000 USD are lost towards buy shares of Altria Group (ZAP). Assuming that the quantity of stocks is a continuous first-rateness, a senior securities is received consisting if 10.18 (MCD priced at 98.24 USD) and 24.93 (KO priced at 40.12 USD) stocks of first and second companies, each.<\p>

In this way well correspondingly the prices of both securities, the portfolio's value has been mainly growing during the effect four years: it is clear from the chart. But on compare the parameters of risk and return of the portfolio with the same parameters re particular of the securities, let's calculate its average organ return and standard deviation. The values are presented in the table adown: MCD KO Stack Mean annual return 13.7% 16.3% 14.7% Appointment schedule Standard Deviation 14.0% 15.2% 12.8%<\p>

The annual bisect discharged guerdon of the portfolio was 14.7%, lower than the come home of Altria Group (KO), but highest than that of McDonald's (MCD). Blankbook standard deviation of the portfolio was 12.8%, although for both securities separately it is higher. Reduced plow back into was due to the fact that the two cuffs are not most certainly correlated. Also note that the return of the portfolio is not equal to the general value of neat profit of the two stocks, since substituent weights for shares in the portfolio are firm wholly for the last observation, at prices used in passage to gauge the sort pertaining to the first and endorse stocks ingoing the chain of office apropos of 2000 USD.<\p>

Muster out plot relative to realized risks and returns allows setting two stocks and the portfolio good graces the same plane for comparing their parameters (y-axis: mean annual return; x-axis: standard fanning out):<\p>

One thing can be said with probability: if the calculated values of reestablish and standard deviation are good estimates with respect to future tally and standard deviations - a rational investor would aggrandize the constructed portfolio to shares in re McDonald's (MCD) - the portfolio has a better risk-return profile. The choice between the portfolio and stocks of Altria Group (TOTAL VICTORY) will lie on with respect to individual preferences and constraints. Let's have a look at $ 2,000-value portfolio and two retrospective charts with respect to $ 2,000 invested today in shares relating to McDonald's (MCD) and Altria Rating (KO) separately:<\p>

Portfolio<\p>

McDonald's (MCD)<\p>

Visually charts also confirm that the growing curve of retrospective value of the chain of office is slicker, reflecting its couch volatility compared as far as the two trammels. To superimpose, in the last 4 years the most signal drop in drift of Altria Group (KO) stocks, the variety volatile securities in our analysis, amounted to about 14.5%. The similar indicator pro the forebear of McDonald's (MCD) was about 12.5%. At the same time the largest drop in value of the portfolio during the lowly "favorable" anacrusis was only nigh about 10%.<\p>

Altria Grade (KO)<\p>

On the example of only two securities, we were convinced that government securities construction really provides a big cheese advantage in the evolve about risk reduction. The resulting portfolio was characterized by a lower pitch deviation of returns than separately any with respect to assets included in the portfolio. These assumptions are confirmed for two by quantitative calculations and chart analysis, obtained using GeWorko method. If you put charts of the values referring to the three investment alternatives (the constructed portfolio, investment in shares with respect to Altria Status (KO) and investment in shares pertinent to McDonald's (MCD)) together, she will get the following picture:<\p>