Journal 1-3

docx

School

Southern New Hampshire University *

*We aren’t endorsed by this school

Course

FIN-640

Subject

Finance

Date

Jan 9, 2024

Type

docx

Pages

Uploaded by thuetheart

Relationship of Risk and Return Tristyn Huet-Heart Southern New Hampshire University FIN-640-Q2361 Investment Analysis & Portfolio Management December 6, 2023 Dr. Geoffrey VanderPal

Rates of Return The rate of return for any stock can be calculated by taking the beginning and ending stock prices within any given period and dividing the difference by the beginning stock price. The five-year rate of return for Apple, Inc. (APPL), Caterpillar, Inc. (CAT), Macy’s (M), Consolidated Edison (ED), and Northern Trust (NTRS) were calculated using this method with a 5-year return starting on December 7 th , 2018 with a close on December 7 th , 2023. From highest to lowest, Apple had a staggering 356% rate of return over the last five years; following closely behind, Caterpillar produced a 107% return to shareholders. While still generating a positive return, only provided investors with a 11% return. Northern Trust and Macy’s stock prices moved in the opposite direction, with diminishing returns of 9% and 48%, respectively. 5 YEAR STOCK PRICES & RATE OF RETURN COMPANY INDUSTRY 7-Dec-18 7-Dec-23 5 Yr RoR APPLE, INC. Info. Tech $ 42.12 $ 192.32 356.60% CATERILLER Industrial $ 123.55 $ 255.97 107.18% CONSOLIDATED ED. Utilities $ 82.46 $ 91.65 11.14% MACY'S Cons. Disc. $ 31.69 $ 16.37 -48.34% NORTHERN TRUST Financial Serv. $ 88.93 $ 80.67 -9.29% Risk Factors Estimating future returns can be difficult as there are many factors that need to be considered including, economic conditions, industry conditions and changes in the market. Historical data that covers a significant period can provide a good indication of a company’s future projections and overall financial health. The informal rule of risk and return tradeoff indicates that trading securities with higher risk tend to generate a higher return. (Chen, 2023) Based on this concept, investors with a risk seeking appetite may consider investing in Apple and

Caterpillar, whereas risk averse investors may consider investing in Consolidated Edison. Macy’s and Northern Trust would be less desirable by investors due to their diminishing returns. Highlighted Risks Publicly traded companies are required by the Securities and Exchange Commissions (SEC) to indicate any potential risks that could impact the company’s earnings and stock price and this information is notated in the annual 10-K report. Apple, Caterpillar, and Northern Trust reported in their 2022 Annual Form 10-K reports that the company’s operations, financial condition, and stock prices are significantly influenced by global and regional economic conditions, creating risk exposure that could negatively impact future investment returns. (Apple, Inc., 2022; Caterpillar, Inc. , 2022; Northern Trust Corp., 2022) . Alternatively, Consolidated Edison’s primary risk that could impact returns is the substantial regulations inflicted by federal, state and governmental agencies and potential changes in utilities rate plans (Consolidated Edison, Inc., 2022) Macy’s annual report indicated that primary risks that could impact growth and returns is related to operational, strategic and competitive risks (Macy's, Inc., 2023) . Market Sector Risk Factor One of the factors that affect the risk analysis for these securities is the sector in which a company operates; the five companies chosen all operate within different sectors of the market. Apple is considered to operating in the information technology sector, Caterpillar operates in the industrial sector, Consolidated Edison in the utilities sector, Macy’s in the consumer discretion sector and Northern Trust in the financial services sector. If an investor were to be invested in all five of these stocks, the portfolio could be considered well diversified. When a stock has a positive correlation, “macroeconomic factors related to systematic risk will typically affect companies in the same industry in similar ways. In contrast, stocks in very different industries,

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

such as a utility stock and a technology stock, could move in opposite directions and have a negative correlation.” (John Wiley & Sons, Inc., 2023) In theory, the losses acquired from Macy’s and Northern Trust, should have been offset by the considerable gains from Apple and Caterpillar. In addition to the market sector risks and risk mentioned in each of the company’s annual reports, investors must also consider other factors such as history length and creditworthiness of a corporation and inflation fluctuations. Time Value of Money (TVM) Investors must consider all risk factors that can impact returns while also being aware of the time value of money concept. When estimating the value expected value of return, it’s important to consider the affect that inflation has on investment returns. “The time value of money has a negative relationship with inflation,” as prices rise during inflationary periods, the value of a dollar decreases. (Fernando, 2023) Therefore, if investors should seek to receive a gain based on a real rate of return, which reduces the inflation rate from the expected nominal rate of return. The value at risk (VaR) is one way that investors can quantify the risk of potential losses and identify correlated investments in efforts to make informed investment decisions (John Wiley & Sons, Inc., 2023) . Investors that are looking to diversify investment opportunities and generate returns that exceed the recent rises in inflation may consider having a diversified portfolio of stocks that include Apple, Caterpillar, Consolidated Edison, Macy’s, and Northern Trust.

References Apple, Inc. (2022, September 24). 2022 Form 10-K . Retrieved from https://s2.q4cdn.com/470004039/files/doc_financials/2022/q4/_10-K-2022-(As- Filed).pdf Caterpillar, Inc. . (2022, December 31). 2022 Form 10-K . Retrieved from https://www.caterpillar.com/en/investors/financial-information/proxy-materials/annual- report-to-shareholders.html Chen, J. (2023, March 7). Risk-Return Tradeoff: How the Investment Principle Works . Retrieved from Investopedia: https://www.investopedia.com/terms/r/riskreturntradeoff.asp#toc-do- investments-with-higher-risks-yield-better-returns Consolidated Edison, Inc. (2022, December 31). 2022 Form 10-K . Retrieved from https://investor.conedison.com/static-files/3657a8a5-9085-4736-8fa2-cede924093d9 John Wiley & Sons, Inc. (2023). Types of Risk . Retrieved from CMA Part 2 - Strategic Financial Management 2023.