Business Finance II (FIN 302)

Section: 01

Report on
Portfolio Analysis
Date: 09th December 2021

Submitted to:
Mr. Mohammad Fahad Noor
Faculty, Business Finance II (FIN 302)
School of Business, Independent University, Bangladesh (IUB)

Submitted by:
Names ID
Sayeda Tanzila Shabazi (1810088)

Maksuda Akther (1810355)

Sharaf Nowsheen Aorony (1810112)

Maliha Mahjabin (1910417)

Umme Habiba Hemu (1830243)

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 Letter of Transmittal

December 09, 2021

Mr. Mohammad Fahad Noor,

Faculty, School of Business

Independent University, Bangladesh

Subject: Assignment on Portfolio Analysis of five same Industry and five different Industry.

Dear sir,

With due respect we, the under singed students of IUB have prepared this report on analysis on
2 portfolios of 10 stocks from yahoo finance. The assignment has been completed by the
knowledge that we have gathered from this course that we have learned from you. We also have
taken help from YouTube videos that you provided.

We, also, would like to draw your attention that we tried our level best to complete this assignment
correctly, and gather appropriate information as much as possible. We have tried our upmost to
live up to your standard. May we, therefore, wish and hope that you would be cordial enough to
our hard work and obligation.

Sincerely your

Sayeda Tanzila Shabazi (1810088)

Maksuda Akther (1810355)

Sharaf Nowsheen Aorony (1810112)

Maliha Mahjabin (1910417)

Umme Habiba Hemu (1830243)

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 Acknowledgement

We would like to express our deepest gratitude to the course coordinator of Independent
University, Bangladesh (IUB) School of Business Department for providing such a professional
yet learning platform for exposing our talents and potentials in the field of FIN.
Our eternal respect towards our Business Finance II (FIN 302), Faculty, Mr. Mohammad Fahad
Noor

We are eternally grateful to him for sharing valuable and incalculable knowledge and guiding us
through all the way in making a successful, neat and clean FIN302 report. Our journey with him
in this course has been truly a worthwhile learning experience.

At the same time, we acknowledge and value the efforts of the team members who have put their
dedication and sincerity upon successfully completing this report work, without their
contributions it would have been an incredibly difficult job to accomplish. We, the group
members have spent considerable amount of time and put effort into designing this very Business
Finance II report. We hope and firmly believe that our faculty will be pleased with the work we
are presenting with.

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 Contents
• Letter of Transmittal ........................................................................................................ 2
• Introduction ....................................................................................................................... 5
• Average Return ................................................................................................................. 6
• Variance ............................................................................................................................. 7
• Standard Deviation ........................................................................................................... 7
• Covariance ......................................................................................................................... 8
• Correlation....................................................................................................................... 10
• Beta ................................................................................................................................... 11
• Variance Covariance Matrix ......................................................................................... 12
• Portfolio Return, Portfolio Variance and Portfolio & Standard Deviation ...................... 15
• Portfolio Beta ................................................................................................................... 16
• Comparison Between two Portfolios ............................................................................. 17
• Evaluation of Optimal Portfolios ................................................................................... 18
• Z Score ............................................................................................................................. 19
• References ........................................................................................................................ 22

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 Introduction

In this assignment, we have analyzed two different types of portfolios. One of them consists of
stocks from the same Industry and another one consists of stocks from different industries. We
have collected our data from Yahoo Finance – Stock Market. For conducting the calculation, we
have taken the monthly closing price of each stock from year 2011-2020. We have done all the
calculation by using MS Excel. Here is ours selected stocks:
Same Industry:

• Johnson & Johnson

• Pfizer Inc
• Sanofi Inc
• Eli Lilly and Company
• UnitedHealth Group Incorporated
Different Industry:

• BHP Group
• Netflix, Inc.
• Walmart Inc.
• American Tower Corporation
• Apple Inc.

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 Average Return

Return in finance is defined as the change in the value of an investment or a stock over time. It can
take the shape of a price change or a percentage change. Investors typically expect a positive return,
which shows a profit or gain on investment. On the contrary, the term "negative return value"
refers to a loss on investment. We had to do the following to achieve the average return:

Calculate the market return on each of the company's closing stock prices individually. The

In the excel spreadsheet, we utilized the following formulas:

= (New Price-Previous Price)/Previous Price

An investor or analyst can understand the trendline of a company's or a portfolio's return over time.
Then, in Excel, we utilized the formulas below to calculate the average return

=AVERAGE (sum of all the returns of the selected company)

Average Return for Portfolio 1

Details Johnson & Pfizer Sanofi Eli Lilly and UnitedHealth

Johnson Inc Inc Company Group
Incorporated

Average Return 0.60% 0.64% 0.21% 0.94% 1.30%

Here, United Health Group Incorporated is in lead on average return compared to the other
companies in the same industry.

Average Return for Portfolio 2

Details BHP Group Netflix, Walmart American Tower Apple Inc.
Inc. Inc. Corporation
Average Return 1% 4% 1% 1% 3%

There is no negative return indicating loss. Netflix Inc has the highest return among these 5
companies.

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 Variance

The term "variance" refers to the calculation of the spread between numbers in a data set. It
calculates the deviation of each number in the set from the mean. The lower the variance, the less
the stock varies widely. In Excel, we used the following formula:

=VAR (all returns of the selected company)

Variance For Portfolio 1

Details Johnson & Pfizer Sanofi Eli Lilly and Company UnitedHealth
Johnson Inc Inc Group
Incorporated

Variance 0.18% 0.35% 0.35% 0.36% 0.53%

All the company in this portfolio shows healthy volatility.

Variance For Portfolio 2

Details BHP Netflix, Walmart American Apple Inc.

Group Inc. Inc. Tower
Corporation
Variance 0.90% 2.31% 0.24% 0.30% 0.82%

All the company in this portfolio also shows healthy volatility, except for Netflix Inc. Netflix,
Inc stock varies widely.

Standard Deviation

The standard deviation of an investment is a measure of its risk. By determining the variation
between each data point relative to the mean, it is determined as the square root of variance. In
Excel, we used the following formulas:

=SQRT(Variance)

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 Standard Deviation for Portfolio 1
Details Johnson & Pfizer Sanofi Eli Lilly and Company UnitedHealth
Johnson Inc Inc Group
Incorporated

Standard Deviation 4.29% 5.88% 5.91% 6.00% 7.28%

United Health Group Incorporated has a higher standard deviation of 0.132908182 in percentage
it comes around 7.28%. The unpredictability is higher for that company.

Standard Deviation for Portfolio 2

Details BHP Group Netflix, Walmart American Tower Apple Inc.
Inc. Inc. Corporation

Standard Deviation 9.46% 15.18% 4.86% 5.52% 9.07%

Netflix Inc has a higher standard deviation of 15.18%. The unpredictability is higher for that
company.

Covariance

The directional link between the returns of two variables or assets is measured statistically as
covariance. It is used to minimize a portfolio's overall risk by increasing the portfolio's
diversification. A positive covariance suggests that the variables have a tendency to move in the
same direction.

A positive covariance indicated that they tend to move in the same direction, while a negative
suggested that they tend to travel in opposite directions. In addition, the Covariance can have
values ranging from negative infinity to positive infinity.

The formula we used in MS Excel, to calculate the covariance of two stocks was,

=COVARIANCE.P(returns for company 1, returns for company 2)

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 Covariance For Portfolio 1
Companies covariance
Johnson & Johnson,pfizer inc 0.001261278
Johnson & Johnson,Sanofi Inc 0.001357093
Johnson & Johnson,Eli Lilly and Company 0.001262739
Johnson & Johnson,UnitedHealth Group 0.001211857
Incorporated
Pfizer inc,Sanofi Inc 0.001666053
Pfizer inc,Eli Lilly and Company 0.001306868
Pfizer Inc, UnitedHealth Group Incorporated 0.001919088
Sanofi Inc, Eli Lilly and Company 0.001161972
Sanofi Inc, UnitedHealth Group Incorporated 0.001676153
Eli Lilly and Company, UnitedHealth Group 0.001426507
Incorporated
In this case, all covariances are positive, differences between the values of covariance between
stocks are quite low. All the companies are moving in the same direction, the covariances are all
positive.

Covariance For Portfolio 2

Companies covariance
BHP Group,Netflix, Inc. 0.002291466
BHP Group,Walmart Inc. 0.000311888
BHP Group,American Tower Corporation 0.001705948
BHP Group,Apple Inc. 0.003124751
Netflix, Inc.,Walmart Inc. -0.000122063
Netflix, Inc.,American Tower Corporation 0.000671968
Netflix, Inc.,Apple Inc. 0.001779759
Walmart Inc.,American Tower Corporation 0.0003105
Walmart Inc.,Apple Inc. 0.000482265

American Tower Corporation,Apple Inc. 0.002009119

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For portfolio 2, the difference in covariances between the companies are not that high. But
covariance between Netflix inc, and Walmart is negative. This indicates that the companies move
in different direction.

Correlation

The correlation coefficient is a statistical technique that is used to determine how strong a linear
relationship between two securities is. The numbers might be anything between -1 and +1. When
the correlation is positive, the two stocks are traveling in the same direction; when the correlation
is negative, the securities are moving in opposite ways. When the value is 0, it indicates that the
two securities have no linear relationship.

Correlation For Portfolio 1

Companies correlation
Johnson & Johnson,pfizer inc 0.500761472
Johnson & Johnson,Sanofi Inc 0.536127139
Johnson & Johnson,Eli Lilly and Company 0.491330335
Johnson & Johnson,UnitedHealth Group 0.388582765
Incorporated
Pfizer inc,Sanofi Inc 0.479972935
Pfizer inc,Eli Lilly and Company 0.370818259
Pfizer Inc, UnitedHealth Group Incorporated 0.448741799
Sanofi Inc, Eli Lilly and Company 0.328067734
Sanofi Inc, UnitedHealth Group Incorporated 0.389989963
Eli Lilly and Company, UnitedHealth Group 0.326900157
Incorporated

All the correlation values are positive indicating the stocks move in the same direction.

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 Correlation For Portfolio 2
Companies correlation
BHP Group,Netflix, Inc. 0.159463422
BHP Group,Walmart Inc. 0.067877915
BHP Group,American Tower Corporation 0.326558617
BHP Group,Apple Inc. 0.364194663
Netflix, Inc.,Walmart Inc. -0.016558295
Netflix, Inc.,American Tower Corporation 0.080176318
Netflix, Inc.,Apple Inc. 0.129295
Walmart Inc.,American Tower Corporation 0.115862148
Walmart Inc.,Apple Inc. 0.109569013
American Tower Corporation,Apple Inc. 0.40148938
There is one negative correlation between Netflix inc, and Walmart. This further indicates that the
companies move in different directions. Another point to be noted is that the correlation values are
much lower than portfolio 1.

Beta
The beta is a measure of a stock's volatility or sensitivity in relation to the stock market's overall
ups and downs. The beta coefficient can be expressed as follows:

• β = 1; stocks are exactly as volatile as the market itself.

• β > 1; stocks are more volatile in than the market.
• β < 1 >0; stocks are less volatile than the market.
• β = 0; stocks are uncorrelated to the market.
• β < 0; stocks are negatively correlated to the market.

For calculating the beta of the individual stocks, the individual return of each stock was used and
the corresponding return of the market price indexes.

The following formula was used for MS Excel:

=COVARIANCE.P(Return of Stock, Return of Market)/VAR.P(Return of Market).

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 Beta For Portfolio 1
Details Johnson & Pfizer Sanofi Eli Lilly and UnitedHealt
Johnson Inc Inc Company h Group
Incorporate
d
Beta 0.78% 3.69% 2.28% 2.80% 1.98%

For portfolio 1, all the stocks moved in the same direction as the market but, Pfizer, Sanofi Inc,
Eli Lilly and Company, and United Health Group incorporated were more volatile than the market.

Beta For Portfolio 2

Details BHP Group Netflix Walmar American Tower Apple Inc.
, Inc. t Inc. Corporation
Beta 6.27% 6.61% 8.48% 8.13% 0.38%

For portfolio 2, all the stock moved in the same direction as the market but the stock for BHP
group, Netflix inc, Walmart Inc, and American Tower Corporation were more volatile than the
market.

Variance Covariance Matrix

The variance-covariance matrix is a square matrix that contains a network of all variance and
covariance values for the portfolio's variables. The variances of the variables or stocks are
represented by the diagonal values of the matrix, while the covariance between all possible pairings
of stocks are represented by the off-diagonal values of the matrix.

The formula used to form the variance-covariance matrix in MS Excel is as follows:

=MMULT (TRANSPOSE (all returns), (all returns))

Doing so, we obtained the following variance-covariance matrices.

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 Variance Covariance Matrix for Portfolio 1
Variance and
Covariance Matrix
Pfizer Sanofi Inc Eli Lilly United
Johnso Inc and Health Group
n& Company Incorporated
Johnso
n
Johnson & 0.18% 0.13% 0.14% 0.13% 0.12%
Johnson
Pfizer Inc 0.13% 0.35% 0.17% 0.13% 0.19%
Sanofi Inc 0.14% 0.17% 0.35% 0.12% 0.17%
Eli Lilly and 0.13% 0.13% 0.12% 0.36% 0.14%
Company
UnitedHealt 0.12% 0.19% 0.17% 0.14% 0.53%
h Group
Incorporate
d

Variance Covariance Matrix For Portfolio 2

Variance and Covariance Matrix
BHP Netflix, Walmart American Tower Apple
Group Inc. Inc. Corporation Inc.
BHP Group 0.90% 0.23% 0.03% 0.17% 0.31%
Netflix, Inc. 0.23% 2.31% -0.01% 0.07% 0.18%
Walmart Inc. 0.03% -0.01% 0.24% 0.03% 0.05%
American Tower 0.17% 0.07% 0.03% 0.30% 0.20%
Corporation
Apple Inc. 0.31% 0.18% 0.05% 0.20% 0.82%

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 Optimal Portfolios

For calculating the optimal portfolio, we have used the solver function from excel to calculate the
optimal weights automatically by using certain variables where the constraint is that the SUM of
weight shouldn't exceed the value of 1.

Same Industry WEIGHTS

JNJ 0.580131829

Pfizer Inc 0.116756537

Sanofi Inc 0.102976930

Eli Lilly and Company 0.144016752

UnitedHealth Group 0.056117953

Incorporated

Total= 1

Different Industry WEIGHTS

BHP Group 0.050141794

Netflix, Inc. 0.046045007

Walmart Inc. 0.533376846

American Tower Corporation 0.346889124

Apple Inc. 0.023547229

Total= 1

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Portfolio Return, Portfolio Variance and Portfolio & Standard Deviation
For calculating portfolio return, portfolio variance and portfolio standard deviation, we have
used the portfolio optimal weights from the previous step.
We have used the formula of

Portfolio return, = MMULT (Q6:U6, R42:R46)

And Portfolio variance = {MMULT (TRANSPOSE (R42:R46), MMULT (R33:V37,

R42:R46))}
And Portfolio standard deviation = SQRT(U42)

Portfolio 1
Portfolio return 0.006519484

Portfolio Variance 0.001602473

Portfolio SD 0.040030895

Portfolio 2
Portfolio return 0.011099724

Portfolio Variance 0.00138633

Portfolio SD 0.37233457

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 Portfolio Beta
For calculating Beta, we have multiplied the weights with the individual Beta of the
company’s stocks.

Portfolio Beta 2:

Industries Portfolio
Beta

BHP Group 0.0627

Netflix, Inc. 0.0661

Walmart Inc. 0.0848

American Tower 0.0813

Corporation

Apple Inc. 0.0038

Portfolio Beta 1 :

Industries Portfolio
Beta

JNJ 0.0078

Pfizer Inc 0.0369

Sanofi Inc 0.0228

Eli Lilly and Company 0.0280

UnitedHealth Group 0.0198

Incorporated

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 Comparison Between two Portfolios

The solver function has helped us to generate optimal weights automatically for these two
portfolios. Based on this, we have calculated the portfolio return, portfolio variance, portfolio
standard deviation and portfolio beta.

Portfolio 1: We see that portfolio return is 0.006519484 or 6.5%. Standard Deviation is

0.040030895 or 4.0% that measure less risk. If we say about weight, here all weights are positive
and less than 1 that means no borrowing. That means less risk and less return. But All stock’s
beta value is greater than 1. That means more risk and more return.

Portfolio 2: We see that portfolio return is 0.011099724 or 1.10%. Standard Deviation is

0.0437233456 or 4.3 % that measure less risk. Here all weights are positive and less than 1 that
means no borrowing. And if we see beta value of each stock, all of them are positive.

Comparison: Among description of these two Portfolio that we describe above, we have come
into a conclusion that portfolio 2 is better. We know that a beta value >1 indicates that the
portfolio will be more volatile than the market. It tells about the portfolio will increase more than
market. That indicates this type of portfolio will increase the portfolio’s risk, but it may also
increase its expected return, positive sign and same direction. That’s why we can say that portfolio
2 is better than portfolio 1. The return of portfolio 2 is also higher. So, Portfolio 2 is more
acceptable.

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 Evaluation of Optimal Portfolios

The gain or loss realized by an investor for an investment in a portfolio including a variety of
assets is referred to as Portfolio Return. When comparing the portfolio returns for the two optimal
portfolios, Optimal Portfolio 1 had a higher return of 0.006519484 and Optimal Portfolio 2 had a
return of 0.011099724. By comparing these two, we can tell that Optimal Portfolio 2 (Different
Industry) is better in terms or return of portfolio as the return for Portfolio 2 is 1.7 times higher
than that of Optimal Portfolio 1 (Same Industry).
Portfolio variance and portfolio standard deviation: Portfolio variance is a measure of a portfolio's
return dispersion, while portfolio standard deviation is a measure of how far an investment return
deviates from the mean of the probability distribution. Optimal Portfolio 1 has the variance of
0.001602473 (0.16%) and standard deviation of 0.040030895 (4%). Optimal Portfolio 2 has the
variance of 0.00138633 (0.1%) and the standard deviation of 0.037233457 (3.72%). By
comparing these values of Optimal Portfolio 1 and Optimal Portfolio 2 we see that Portfolio 1
has higher variance and standard deviation than Portfolio 2. This means the data in Optimal
Portfolio 1 indicates riskier investment as their values are more spread out, but they are still pretty
close.
The relative sensitivity or volatility of a portfolio investment is measured by portfolio beta. A
portfolio with a higher beta carries a higher risk, but it also has a larger return. The portfolio beta
for Optimal Portfolio 1 was 0.016317687 and for Optimal Portfolio 2 was 0.0796807077. We can
see that neither of the portfolios have a high beta meaning they are not as risky and volatile.
However, Optimal Portfolio 2 still has a slightly higher portfolio beta by 0.063 than Portfolio 1,
indicating that it is ever so slightly riskier, but has higher earning potential.
So, in terms of overall performance Optimal Portfolio 2 is performing better than Optimal
Portfolio 1 as it has more expected return. Both portfolios’ performance is pretty close as
suggested by standard deviation and variance. But by comparing the Portfolio Beta, Optimal
Portfolio 2 is riskier. So, for an investor who is risk-averse Optimal Portfolio 1 is the better choice
and for an investor who is a risk taker Optimal Portfolio 2 is the better portfolio as it brings much
higher returns.

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 Z Score

Z Score Model formula for Same Industries

Z=3.3*(EBIT/Total Assets) + 1.2*(Net Working Capital/Total Assets) + 1.0*(Sales/Total Assets)

+ 0.6*(Market Value of Equity/Book Value of Debt) + 1.4*(Accumulated Retained
Earnings/Total Assets)

• JNJ 2020

=3.3*(16698000000/ 157728000000) +1.2*(9310000000/ 157728000000)

+1*(82584000000/157728000000) +0.6*(419169400000/ 98257000000)
+1.4*(113890000000/157728000000)
=4.51>2.99
This is indicated that the Z score of JNJ is greater than 2.99 that’s why the company
will not be bankrupt.

• Pfizer Inc.

=3.3*(8946000000/154229000000) +1.2*(9147000000/154229000000)
+1.0*(41908000000/154229000000+0.6*(304454700000/90756000000) +1.4*(96770000000
/154229000000)
=4,42>2.99

This is indicated that the Z score of Pfizer Inc. is greater than 2.99 that’s why the company
will not be bankrupt.

• Sanofi Inc.

3.3*(14240000000/114529000000) +1.2*(14,50,60,00,000/114529000000)
+1*(37369000000/114529000000) +0.6*(1,18,14,57,00,000/51,38,20,00,000)
+1.4*(51,38,20,00,000/114529000000)
=2.27<2.99

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This is indicated that the Z score value of Sanofi Inc. is less than 2.99 but greater than 1.81. We
can say that the company is in gray area. We are not sure the company will be bankrupt
or not.

• Eli Lilly and Company

=3.3*(7589500/46633100) +1.2*(49,80,500/ 46633100) +1.0(2,45,39,800/46633100)
+0.6*(2,34,91,93,72,200/ 4,08,07,900) +1.4*(7830200/ 46633100)
= 3455.454396>2.99

This is indicated that the Z score of Eli Lilly and Company is greater than 2.99 that’s why the
company will not be bankrupt.

• United Health Group Incorporated

=3.3*(22405000000/ 197289000000) +1.2*(18,70,20,00,000.00

/ 197289000000) +1*(2,55,63,90,00,000/ 197289000000)
+0.6*(4,23,19,20,42,000/1,28,96,10,00,000) +1.4*(69295000000/197289000000)
=4.02>2.99
This is indicated that the Z score of United Health Group Incorporated is greater than 2.99 that’s
why the company will not be bankrupt.

Z Score Model formula for Different Industries

• BHP Group

=3.3(25539000000/ 108927000000) +1.2(10,29,00,00,000.00 /108927000000) +1(60,81,70

,00,000.00 /108927000000) +0.6(1,46,33,52,00,000/53,32,20,00,000)
+1.4(46779000000/108927000000)
=3.69>2.99
The value of Z score of BHP Group is greater than 2.99. So, we can say that this company will
not be bankrupt.

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• Netflix Inc

=3.3(4585289000/39280359000) +1.2(1,95,57,95,000/39280359000)
+1(24996056000/39280359000) +.6(2,77,10,06,61,000/28,21,51,19,000)
+1.4(7573144000/39280359000)
=7.24>2.99
The value of Z score of Netflix Inc greater than 2.99. So, we can say that this company will not
be bankrupt.

• Walmart Inc
=3.3(22879000000/252496000000) +1.2(2,57,80,00,000.00/ 252496000000) +1($
5,59,15,10,00,000/252496000000) +.6(5,98,53,60,00,000/1,64,96,50,00,000)
+1.4*(88763000000/252496000000)
=5.17>2.99
The value of Z score of Walmart Inc greater than 2.99. So, we can say that this company will not
be bankrupt.

Conclusion

To summarize, we have explained the positions of two distinct Portfolios (each with five firms)
and compared them to the market in this report. The 10 companies with whom we worked ranged
from five that were in the same industry domain, healthcare and others that were in a wide range
of industrial domains. The given individual return, average return, individual risk, market and
portfolio return and risk, and finally, optimal portfolio analysis would give stakeholders and
associated parties with better clarity. We also calculated Z-scores for all of the companies to
evaluate their credit strength and bankruptcy risk. Simply put, this report can serve as a roadmap
for analyzing the financial status of all of the firms on which we worked, as well as assisting
investors in making informed judgments. We created this research in the hopes of assisting
investors who are interested in investing in the following markets and to gain a better
understanding of how these companies' shares or investments differ from the market portfolio.
This study will undoubtedly provide further leverage to a rational investor before investing in
these two stocks. (Yahoo Finance, 2021)

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 References

• Yahoo Finance. (2021). Yahoo Finance. Retrieved from Industries:

https://finance.yahoo.com/screener/predefined/ms_industrials/?.tsrc=fin-srch

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