Sheet1intial Investement1000000large Cap Diversified Stock Portfoli ✓ Solved

Examine an initial investment of $1,000,000 in a large-cap diversified stock portfolio by investing it in five selected stocks. The investment date is January 31, 2021. The data includes the total investment amount, stock prices as of January 29, 2021, shares purchased, total investment, beta values, adjusted beta, and reported annual dividends for each stock.

The stocks are as follows:

  • NHI: Cost of buying $64.95, Beta 0.969, Reported annual dividend $4.41

  • APAM: Cost of buying $48.90, Beta 1.606, Reported annual dividend $3.08

  • IBM: Cost of buying $119.23, Beta 1.157, Reported annual dividend $6.52

  • SAFT: Cost of buying $73.31, Beta 0.5407, Reported annual dividend $3.60

  • NEE: Cost of buying $80.17, Beta 0.446, Reported annual dividend $1.54

The total investment is $772,419, with $227,581 held in cash.

Paper For Above Instructions

Investing in a large-cap diversified stock portfolio can be an effective strategy for achieving long-term financial goals. The allocation of an initial investment of $1,000,000 into five carefully selected large-cap stocks shows a balanced approach to investment, considering both growth potential and dividend income. The stocks chosen for this portfolio were NHI, APAM, IBM, SAFT, and NEE, each exhibiting different risk levels indicated by their beta values, which are crucial for risk assessment in portfolio management.

Portfolio Overview

The total investment in the selected stocks amounts to $772,419, while $227,581 is held in cash. This cash reserve can serve as a buffer against market volatility and allows for the possibility of reinvesting in other opportunities as they arise. The selected stocks have various characteristics regarding prices, beta scores, and dividends that make them suitable candidates for the portfolio.

Stock Analysis

Each stock in this portfolio exhibits its unique features of risk and return:

  • NHI: With a purchase price of $64.95 and a beta of 0.969, NHI is around the market average in volatility, making it a relatively stable investment. The reported annual dividend of $4.41 provides a decent income stream for investors.

  • APAM: At a price of $48.90 and a higher beta of 1.606, APAM indicates a greater potential for both gains and losses, suggesting it is a more aggressive stock in this portfolio. Its annual dividend of $3.08 can attract income-focused investors despite the risks involved.

  • IBM: As a well-known entity in the technology sector, IBM's involvement in this portfolio offers a balance between growth and stability, with a price of $119.23 and a beta of 1.157. The reported dividend of $6.52 is compelling for investors seeking monthly cash flow.

  • SAFT: SAFT has a lower price of $73.31 and a beta of 0.5407, indicating that it is less volatile compared to the others, which can provide steadiness during uncertain market conditions, alongside its $3.60 annual dividend.

  • NEE: With a price of $80.17 and the lowest beta in this portfolio at 0.446, NEE represents a defensive stock, potentially providing stability. The dividend yield is modest at $1.54, enhancing the income aspect of the portfolio while minimizing exposure to risk.

Risk Management

Risk management is critical in portfolio investment. The presence of stocks with varying beta values helps in mitigating overall portfolio risk. Stocks with higher betas (like APAM and IBM) can offer greater returns, while lower beta stocks (like NHI and NEE) can help stabilize the portfolio during tumultuous market periods.

Cash Reserve Utilization

The decision to hold $227,581 in cash provides flexibility for future investments or reallocation if particular stocks underperform. This strategy allows the investor to respond to market changes proactively, whether it involves reinvesting the cash reserves into other stocks or utilizing them to manage losses or cover unexpected expenses.

Conclusion

This analyzed portfolio configuration employs a broad diversification strategy across five large-cap stocks, balancing the need for growth with income through dividends while carefully managing risk. The synergy of stock selections reflects the aim to penetrate various sectors, ensuring that the portfolio is robust enough to withstand market fluctuations and providing a steady portfolio performance.

References

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