Course Code: FIN302 Semester: Summer 2021

Group:03

-
Topic: Financial report on analysis of Two different
portfolios.
Faculty:
02 Mr. Mohammad Fahad Noor
Semester: Summer 2021

Date of submission: 29th August 2021

Submitted By

- Name Submitted By ID
Md. Sahinur Kabir 1830944
Samrat Abu Kayes 1921540
02 Semester: Summer 2021
Aareana Paarvez Kashfia 1830421
Sawrav Ghosh 1830003
Md Zahin Ahmed Maunim 1830722

02 Semester: Summer 2021

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Letter of Transmittal
29 August 2021
Mohammad Fahad Noor,

Senior Lecturer
Department of Finance
Independent University, Bangladesh.

Subject: Construction of two different portfolios.

Dear Sir,
It is an immense pleasure for us to submit the report on construction and analyze two different
portfolios. We have tried our level best to fulfill all requirements of this report and follow your
instructions while preparing this report. We tried to gather data from a reliable source to make the
report more informative. I earnestly thank you for your guidance during the preparation of this
assignment. Any sort of suggestion regarding the report will be greatly acknowledged.

It would be a profound pleasure for us if the report can serve its purpose. We'll be available at any
time to explain to you any queries if you feel necessary.

Thank You.
Regards
Md. Sahinur Kabir

Samrat Abu Kayes

Sawrav Ghosh
Md Zahin Ahmed Maunim

Aareana Paarvez Kashfia

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Acknowledgement
In completing our assignment, we would like to express our gratitude to our instructor, Mohammad
Fahad Noor, Senior Lecturer Department of Finance Independent University, Bangladesh., for his
strong guidance and valuable discussions in finishing our work on constructing two different
portfolios. In addition, we highly admire his unwavering support and knowledge that worked as a
roadmap for us to complete this report.

We appreciate your assistance with our project. We would also like to express our heartfelt
gratitude to everyone who has helped us write this assignment, both directly and indirectly.

Many people, particularly our team members, have offered insightful comments and suggestions
on this proposal, inspiring us to improve our report vastly. We appreciate everyone's assistance in
completing our report, both directly and indirectly.

Thank you!

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Table of Contents

GROUP:03 ......................................................................................................................................1

LETTER OF TRANSMITTAL ....................................................................................................2

ACKNOWLEDGEMENT .............................................................................................................3

EXECUTIVE SUMMARY ...........................................................................................................5

AVERAGE RETURN ....................................................................................................................6

VARIANCE ....................................................................................................................................7

STANDARD DEVIATION ...........................................................................................................8

COVARIANCE ..............................................................................................................................9

CORRELATION .........................................................................................................................11

BETA.............................................................................................................................................13

VARIANCE-COVARIANCE MATRIX ...................................................................................14

OPTIMAL PORTFOLIO ...........................................................................................................16

OPTIMAL PORTFOLIO EXPECTED RETURN, STANDARD DEVIATION AND BETA

........................................................................................................................................................17

PERFORMANCE ........................................................................................................................18

Z-SCORE ......................................................................................................................................19

REFERENCE ...............................................................................................................................21

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Executive Summary
The assignment is based on constructing two portfolios using closing price, average return,
variance, standard deviation, covariance, correlation, the beta of individual stocks, variance-
covariance matrix in each portfolio; through solver, we found the weights and constructed the
optimal portfolio. We have collected all the information from Yahoo Finance and took the market
price of two portfolios from S&P 500. Moreover, we calculated the portfolio expected return,
standard deviation, and beta. Also, we suggested the best-performing portfolio using the Sharpe
Ratio measure. The Z-scores have been calculated using the annual report and predicted the
bankruptcy situation based on the score.

Portfolio-1 (Same Industry):

Jhonson and United Pfizer Novo CVS Health

Jhonson Health Nordisk A/S Corporation
Group Inc.

Portfolio-2 (Different Industry):

Haliborton Amazon Tesla Inc. Microsoft American

company Tower

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1. Calculate average return, variance, standard deviation, covariance,
correlation, beta for individual stocks in each portfolio.

Average return
The definition of average return is the percentage rate of return expected over a specific period. It
can help to measure the past performance of the portfolio. We choose five companies from the
same industries and the other five companies from different industries. Furthermore, We collected
the last ten years' company's data from yahoo finance. We picked Johnson & Johnson, United
Health Group Inc., Pfizer Inc., Novo Nordisk A/S (NVO), and CVS Health Corporation for the
same industry. Moreover, the portfolio of different industries is Halliburton Company, Amazon,
Tesla Inc., Microsoft, and American Tower Co.
We must calculate the individual market return on each company's monthly closing stock price to
calculate the average return. We use the company's closing price to find out the annual average
return.
The annual average return of Portfolio 1(Same Industry):
Title Johnson & United Health Pfizer Inc. Novo Nordisk CVS Health
Johnson Group Inc. A/S (NVO) Corporation
Average Return 10.53% 24.72% 9.63% 13.79% 9.22%
Annually

After calculating the average return on the same industry, we have found that no company has
faced any loss. Between these five industries, United Health Group Inc. has better performance
with 24.72%. And then Novo Nordisk comes next in average return annually, which is 13.79%. In
the same industry portfolio, CVS Health Corporation has the lowest rate, 9.22%. However,
Johnson & Johnson has a much higher average return compare with Novo and CVS Company.

The annual average return of portfolio 2 (Different Industry):

Title Halliburton Amazon Tesla Inc. Microsoft American

Company Tower Co.
Average Return 3.25% 33.09% 66.19% 22.91% 16.12%
Annually

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In portfolio 2, we have calculated different industries' annual average returns. From portfolio 2,
we have found that Tesla has the highest annual average return of 66.19%. Its seams Tesla has
increase value in investment over a while comparing with other company in the table. Amazon
would be in the second position because they have a 33.09% annual average return compared with
these five different companies. Compare between Microsoft and American Tower, Microsoft has
a higher annual average return. In the end, Halliburton Company has the lowest annual average
return, which is 3.25%. Though the company has no negative value or facing any losses, the
company does not make too much profit.

Compare these two portfolios; we can say no company is facing any losses. In portfolio 2, we are
doing better performance than portfolio 1. Especially Tesla is doing a better performance than
amazon.

Variance
The variance is a measure of variability. To calculate variance, need the average of squared
deviations from the mean. It helps to find out the degree of spread in the data set. The more spread
the data, the variance is concerning the mean.

We use a formula in excel to calculate the variance,

Portfolio-1 (Same Industry):

Title Johnson & United Health Pfizer Inc. Novo Nordisk CVS Health
Johnson Group Inc. A/S (NVO) Corporation
Variance 2.25% 3.62% 3.36% 4.88% 4.93%

From the table we can see, in portfolio 1, all companies variance result is quite close. However,
Johnson & Johnson holding the lowest 2.25% rate than others companies. CVS Health has 4.93%,
which is much higher than other companies. As we know higher, the variance means the more
widely stock fluctuates and the stock riskier. United Health and Pfizer have almost the same
variance.

From portfolio 1, we can say Johnson & Johnson has a low variance that means its stocks has less
risky. On the other hand, CVS health has a high variance, indicating they have a higher risk in
their stock than other companies.

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Portfolio-2 (Different Industry):
Title Halliburton Amazon Tesla Inc. Microsoft American
Company Tower Co.
Annual Variance 19.84% 7.88% 38.77% 4.07% 2.73%

From the table, we can see Tesla Inc. holding much highest rate, which is 38.77%. That indicates
Tesla has high risk; also, they have a high return. These high variance stocks will be suitable for
aggressive investors who are less risk average. Halliburton company holding a 19.84% rate; the
company also has high risk. American tower containing the lowest variance. The company is
holding lower risk that means the company gains low return.

We can say that portfolio one performs better between these two portfolios because they have a
lower variance than portfolio 2.

Standard deviation
A standard deviation is a statistical process that measures the differences of each observation from
the mean. Standard deviation is used to determine market volatility and risk when it comes to
returns stocks. High-risk stock will demonstrate an unpredictable.

Portfolio-1 (Same Industry):

Title Johnson & United Health Pfizer Inc. Novo Nordisk CVS Health
Johnson Group Inc. A/S (NVO) Corporation
Standard Deviation 15.01% 19.03% 18.34% 22.09% 22.21%

As we can see, CVS Health Corporation holds the most significant standard deviation, 22.21%,
and Novo has quite almost the same rate. Compare between United and Pfizer; United has a much
higher standard deviation. However, Johnson & Johnson has the lowest standard deviation, with
15.01%. That means Johnson has less risk, but CVS has a more significant profit.

Portfolio-2 (Different Industry):

Title Halliburton Amazon Tesla Inc. Microsoft American
Company Tower Co.
Standard Deviation 12.86% 8.10% 17.98% 5.83% 4.77%

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The table shows that Tesla Inc. has the highest standard deviation rate, 17.98%. That means
investors are taking high risks but, in return getting more profit than any other company.
Halliburton Company is holding a 12.86% standard deviation. Between Amazon, Microsoft, and
American Tower, American Tower has the lowest standard deviation, 4.77%.

We can see from portfolio 2 American Tower has the lowest standard deviation, which means this
stock has lower risk and lower return, but on the other hand, Tesla Inc. holds the highest standard,
which means it has a greater possibility of increased risk with high profit.

So, we can say portfolio 2 is much better than portfolio 1. Except for two companies from portfolio
2, they have lower risk and return.

COVARIANCE
The amount that two assets move in respect to each other is measured by covariance, a statistical
term mainly used in security and portfolio evaluation. A positive covariance means the assets move
in the same direction, and negative covariance means the assets move in the opposite direction.

The COVARIANCE tables of Portfolio-1 (Same Industry) are presented below:

Companies Covariance
Johnson & Johnson, United Health Group Inc. 0.000873
Johnson & Johnson, Pfizer Inc. 0.001325
Johnson & Johnson, Novo Nordisk A/S (NVO) 0.000865
Johnson & Johnson, CVS Health Corporation 0.000988
United Health Group Inc, Pfizer Inc. 0.001249
United Health Group Inc, Novo Nordisk A/S (NVO) 0.000733
United Health Group Inc, CVS Health Corporation 0.001734
Pfizer Inc, Novo Nordisk A/S (NVO) 0.001186
Pfizer Inc, CVS Health Corporation 0.001412
Novo Nordisk A/S (NVO), CVS Health Corporation 0.000931

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From the table, we can see Johnson & Johnson and United Health Group Inc. has .000873 of
covariance that indicates If an increase in Johnson & Johnson price increase in the United Health
Group Inc price, both variables are said to have positive covariance.

Johnson & Johnson, Pfizer Inc., and Johnson & Johnson, Novo Nordisk also have a similar
covariance value: .001325 and .000865.

Covariance of United Health Group Inc, Pfizer Inc; United Health Group Inc, Novo Nordisk, and
United Health Group Inc, CVS Health Corporation has the covariance of 0.000733, 0.001734, and
0.001734.

Pfizer Inc, Novo Nordisk; Pfizer Inc, CVS Health Corporation; Novo Nordisk, CVS Health
Corporation also has positive relation which is 0.001186, 0.001412, and 0.000931. So that means
all of the company’s covariance is positive, and they are moving in the same direction.

The COVARIANCE tables of Portfolio-2 (Different Industry) are presented below:

Companies Covariance
Halliburton, Amazon 0.03993493
Halliburton, Tesla Inc. 0.099606343
Halliburton, Microsoft 0.029328225
Halliburton, American Tower 0.004054525
Amazon, Tesla Inc. 0.034221427
Amazon, Microsoft 0.026087008
Amazon, American Tower 0.009408923
Tesla Inc., Microsoft 0.034289915
Tesla Inc., American Tower -0.004120871
Microsoft, American Tower 0.008390727

From the table, we can see Halliburton, Amazon; Halliburton, Tesla Inc.; Halliburton, Microsoft,
and Halliburton, American Tower company’s covariance all are in positive value which is
0.03993493, 0.099606343, 0.029328225, and 0.004054525.

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Amazon, Tesla Inc.; Amazon, Microsoft, and Amazon, American Tower has the covariance value
of 0.034221427; 0.026087008, and 0.009408923. So, there is a positive relationship between every
two of the company.

Tesla Inc., Microsoft; Microsoft, American Tower has the positive covariance of 0.034289915 and
0.008390727, but Tesla Inc., American Tower, experiencing the negative relationship of
0.004120871, which means these variables are moving in the opposite direction.

In the case of covariances, we can see portfolio -1 and portfolio-2 act almost like the same.
Nevertheless, in portfolio-2, some companies have a strong covariance relationship with a higher
value of covariance.

Correlation
Correlation is the relationship between two individual securities. A positive correlation indicates
that the securities are moving in the same direction, and a negative correlation indicates moving
in opposite directions. This is represented by a value between -1 and 1, and 0, meaning no
correlation between the two securities.

The correlation tables of Portfolio-1 (Same Industry) are presented below:

Companies Correlation
Johnson & Johnson, United Health Group Inc. 0.369979928
Johnson & Johnson, Pfizer Inc. 0.582949174
Johnson & Johnson, Novo Nordisk A/S (NVO) 0.315908707
Johnson & Johnson, CVS Health Corporation 0.358764919
United Health Group Inc, Pfizer Inc. 0.433262009
United Health Group Inc, Novo Nordisk A/S (NVO) 0.2109607
United Health Group Inc, CVS Health Corporation 0.496639397
Pfizer Inc, Novo Nordisk A/S (NVO) 0.354430301
Pfizer Inc, CVS Health Corporation 0.419584992
Novo Nordisk A/S (NVO), CVS Health Corporation 0.229787933

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The table shows the correlation between Johnson & Johnson and United Health Group Inc is
almost 0.37, indicating that these two companies' stocks are moving in the same direction. So, if
the price of Johnson & Johnson decreases, the price of United Health Group Inc stocks also
decreases, and if the price of Johnson & Johnson increases, so do the United Health Group Inc.
stocks.

The correlation between Johnson & Johnson and Pfizer Inc is almost .58, which is higher than
Johnson & Johnson, United Health Group Inc. correlation, which represents that the stock price of
these companies moving in the same direction, and these companies have a stronger linear
relationship.

Johnson & Johnson, Novo Nordisk, and Johnson & Johnson, CVS Health Corporation have a value
of almost .32 and .36, representing the positive correlation between the two stocks.

United Health Group Inc, Pfizer Inc, and United Health Group Inc, Novo Nordisk has a correlation
value of .43 and .21.

On the other hand, United Health Group Inc, CVS Health Corporation correlation value is almost
.50, which is higher than the previous two stocks.

Pfizer Inc, Novo Nordisk, Pfizer Inc, CVS Health Corporation correlation is almost positive .35
and .42.

Furthermore, Novo Nordisk A/S (NVO), CVS Health Corporation has a correlation value of .23.

The correlation tables of Portfolio-2 (Different Industry) are presented below:

Companies Correlation
Halliburton, Amazon 0.322106877
Halliburton, Tesla Inc. 0.362155109
Halliburton, Microsoft 0.328952718
Halliburton, American Tower 0.055522826
Amazon, Tesla Inc. 0.197443492
Amazon, Microsoft 0.464311075
Amazon, American Tower 0.204460102
Tesla Inc., Microsoft 0.275113389
Tesla Inc., American Tower -0.040366234
Microsoft, American Tower 0.253553071

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From the table, we can see Halliburton and Amazon correlate almost .32, indicating the positive
relationship between these two companies' stocks. That means these company’s stock is moving
in the same direction.

Halliburton, Tesla Inc., and Halliburton, Microsoft company also has the almost similar value of
.36 and .32. Moreover, Halliburton, American Tower has the lowest value of the correlation of
nearly .06.

Correlation between Amazon, Tesla Inc., and Amazon, Microsoft also has the positive correlation
value of .19 and .46, which indicates that these stocks value moving in the same direction. Amazon,
American Tower also has a positive correlation of .20.

Tesla Inc., Microsoft, and Microsoft, American Tower correlates .27 and .25. However, Tesla Inc.,
American Tower correlates negative .04, which indicates that these company’s stock is moving in
the opposite direction. In short, if one stocks price increases, the other stock price decrease with
the same magnitude and vice versa.

However, after analyzing the correlation of the two portfolios, we can see that portfolio-1 (Similar
Industries) performs better because, in portfolio -1, which contains the same industry, their
correlation relationships are more robust than portfolio -2, which includes different industries.

Beta
The Beta coefficient measures the risk of an individual's securities. The beta value of more than 1
indicates the stock has more risk and more return, whereas a beta value less than 1 means the stock
has less risk and less return. Moreover, if the beta value is 1, the stock should get the same return
as the market. If the beta value is 0, that explains stock is a risk-free asset. On the other hand, if
beta has a positive sign, then we can say it will move with the market in the same direction but if
this value is negative, then move in the opposite direction.

The Beta tables of Portfolio-1 (Same Industry) are presented below:

Johnson & United Health Pfizer Inc. Novo Nordisk CVS Health
Johnson Group Inc. A/S (NVO) Corporation
0.68 0.68 0.74 0.58 0.73

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From the table of portfolio-1, we can see that all the beta value of these companies is less than 1
and have a positive sign. So, we can say that these companies are less risk and less return. Also,
they will move with the market in the same direction.

The Beta tables of Portfolio-2 (Different Industry) are presented below:

Halliburton American
Amazon Tesla Inc. Microsoft
Company Tower Co.
2.26 1.15 1.59 .90 .37

From portfolio-2, we can see Halliburton Company has the highest beta value, which is 2.26 that
means this company is supposed to be riskier but provide higher return potential than the market.
Amazon and Tesla inc. also have a beta value of 1.15 and 1.59. So, these companies are also risky
and supposed to provide a higher return.
Furthermore, Microsoft and American Tower Co. are less volatile than the market, with almost .90
and .37 beta values. So, we can say these companies are less risky and supposed to provide less
return.
However, all these companies have positive signs which indicate they will move with the market
in the same direction.
After analyzing the beta value of these portfolios, we can say that the portfolio-1 companies are
less risky and provide less return, and the portfolio-2 companies are riskier and give a higher return.

2. Calculate variance-covariance matrix for each portfolio.

Variance-Covariance Matrix
Variance means the divergent from the mean value of a particular variable and how much the
variable varies from the average value of the variable, and Covariance shows us the mean deviation
of two independent variables. Here we calculate our selected company’s variance and Covariance
via variance-Covariance matrix. It helps to understand the variation of two companies' returns
variance altogether. It shows us how much the return will vary if we take them in a portfolio. We
calculate the variance-covariance matrix of our selected company in the below chart.

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The Matrix tables for both the portfolios are displayed below:

Portfolio-1 (Similar Industries)

Variance and Covariance matrix

Johnson & Johnson United Health Group Inc. Pfizer Inc. Novo Nordisk A/S (NVO) CVS Health Corporation
Johnson & Johnson 0.022329373 0.010475905 0.015905187 0.010382069 0.011855274
United Health Group Inc. 0.010475905 0.035904612 0.014989791 0.008791455 0.020810364
Pfizer Inc. 0.015905187 0.014989791 0.033338011 0.014232616 0.016941551
Novo Nordisk A/S (NVO) 0.010382069 0.008791455 0.014232616 0.048369112 0.011175698
CVS Health Corporation 0.011855274 0.020810364 0.016941551 0.011175698 0.048902016

Here in this variance-covariance analysis, we saw the variance of each company from their mean
value and show much the share return varies with different shares. Here we saw that if we invest
only in Johnson & Johnson Company, the return variance will be 0.022 and if we invest in other
shares like Johnson and United health group, then variance change and become 0.010, which
means the variability reduces. Similarly, we saw much less variability in united health group Inc.
and Novo Nordisk A/S (NVO). There was only 0.0088, which means if we invest in these two
shares, the return will vary only 0.0088, indicating a safer return. On the other hand, if we invest
in United health and CVS Health, then we will get 0.021 variability that is relatively higher
diversification that means there is a higher return because return can vary either in a positive way
but can be a negative way that’s why before investment, we need to consider this matter. This
variance is shown in a similar business portfolio.

Portfolio-2 (Different Industries)

Variancee-Covariance matrix
Halliburton Company Amazon Tesla Inc. Microsoft American Tower Co.
Halliburton Company 0.196738797 0.03993493 0.099606343 0.029328225 0.004054525
Amazon 0.03993493 0.078129644 0.034221427 0.026087008 0.009408923
Tesla Inc. 0.099606343 0.034221427 0.384498589 0.034289915 -0.004120871
Microsoft 0.029328225 0.026087008 0.034289915 0.040403092 0.008390727
American Tower Co. 0.004054525 0.009408923 -0.004120871 0.008390727 0.027104842

Here we analyze the companies’ variance-covariance, which is come from different industries.
Here we saw relatively high variability in terms of variance and covariance matrix like we saw
Halliburton and Tesla’s covariance was 0.0996, which belong in different industries and have
higher variability from the average return. Here in this analysis, we saw the highest deviation

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between Tesla and Halliburton Company, and on the other hand, Tesla and American Tower
Covariance were negative, which means if we invest in these two shares, their return will be
negatively differ. So, hare variance Covariance helps us identify which two shares will give more
security about return because we will invest in different shares.

3. By using solver, construct the optimal portfolio.

Optimal Portfolio
A portfolio means the set of shares from a different company based on lower risk with a higher
return, and here we try to figure out which portfolio will be better for the investor in the same
industry portfolio will be profitable or different industries portfolio will be more beneficial.

Portfolio-1 (Same Industries)

Optimal Portfolio
Company Weights
Johnson & Johnson 0.00371788
United Health Group Inc. 0.832282413
Pfizer Inc. 0
Novo Nordisk A/S (NVO) 0.163999707
CVS Health Corporation 0
Total Weight 1

Portfolio Return 22.87%

Portfolio Variance 2.86%
Portfolio Standard Deviation 16.93%
Sharp Ratio 1.17
y" 0.693657192

In this analysis, we try to understand the profitability and risk related to the same industry portfolio.
At first, we make a weight of share-based on higher return with the lower risk level. Here in our
same industry portfolio, we invest 83% weight in United Health Group Inc. and then 16% in Novo
Nordisk A/S (NVO) share and remain 0.3% we invest in Johnson and Johnson company based on
their return risk level. After the portfolio, we calculate the return and risk via standard deviation,
and we saw a very high return in the same industry portfolio, and the risk level was also in control.
There was only 0.1693, and the sharp measure was positive, and y was 0.693.

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Portfolio-2 (Different Industries)

Optimal Portfolio
Company Weights
Halliburton Company 0.00
Amazon 0.26
Tesla Inc. 0.15
Microsoft 0.17
American Tower Co. 0.42
Total weight 1.00

Portfolio Return: 29.17%

Portfolio Variance: 2.93%
Portfolio SD: 17.11%
Portfolio Beta:

Sharpe Ratio 1.529232463

y* 0.893678366

Here in this analysis, we analyze the risk and return of different industry portfolios based on higher
returns with lower risk levels, and where we invest our money in four different securities based on
higher returns with lower risk. The majority weight of our investment was in American Tower Co.
that was 425. In amazon, there was 26% after that 175 in Microsoft, and lastly 15% in Tesla Inc.
After the portfolio selection, we calculated the risk and return of our security, and here we saw
29.17% return of our portfolio that is huge for any portfolio. There was a 17.11% risk level
associate with the portfolio, and we know that higher return comes with a higher risk level and we
a positive Sharpe measure that was more than one time, and Y was positive in our different industry
portfolios.

4. Again calculate portfolio expected return, standard deviation and beta.

Optimal Portfolio Expected return, Standard deviation and Beta
From excel and previous table. we can see that the equally weighted portfolio of the same industry

has a 13.58% return and variance is 1.84%. Moreover, the standard deviation is 13.56%.
However, in portfolio-2, the return is 28.31%, the variance is 5.16%, and the standard deviation is
22.71%.
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After analyzing these two portfolios, we can say portfolio two is doing better in equally weighted.
Though portfolio-2 has a high variance and high chance of risk, it has a double return.

In optimal risky calculation, portfolio-1 has 22.87% in return, 2.86% in variance, and 16.93% in
standard deviation. But in portfolio-2, the return is 29.17%, variance is 2.93%, and the standard
deviation is 17.11%.

After comparing these two optimal risky portfolios, portfolio-2 is doing better than 1. As we can
see, portfolio 2 has a much higher return than 1, and the two portfolios have a similar result in
variance. That means both portfolios have almost the same risk. Nevertheless, portfolio-2 has a

greater return.
As we can see, in portfolio-1, beta is 0.66, but in portfolio-2, beta is 0.848. As we know, if the beta
is less than 1, that means less risk, less return. Portfolio-2 has a greater beta than portfolio-1, and

it is almost near 1. So, we can say portfolio-2 is doing better.

The sharp ratio is used to help the investor understand the return of an investment compared with
its risk. A higher sharp ratio indicates well. In portfolio-1, the sharp ratio is 1.17, but in portfolio

2, it is 1.52. So, we can say portfolio-2 is doing better than portfolio 1.

5. Between the two optimal portfolios which one is performing better?

Performance
After all the portfolio-making process is complete, we conduct an extensive analysis of the final
decision about selecting the best portfolio between these two portfolios. Here we construct the first
portfolio with the same industry and another portfolio with a mixture of industries. For the
construction of these two portfolios, we analyze the ten-year return of every security to understand
the sustainable return pattern, calculate the average return of the last ten-year return, and then
calculated variance, covariance, correlation, and Standard deviation of each share. After that, we
pick the appropriate investment weight to construct our desired portfolio based on positive returns
and lower risk levels. After the portfolio construction, we calculate portfolio return risk and
different measurements to finalize the selection process of our desire portfolio. After all, we saw
a better return in different industry portfolios that was 29%. Above with a little higher risk, same

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industry portfolio and we know the return is more important because same industry return was
22% and on their other hand different industry portfolio return was 29% there was 7% gap, but
risk level was 1% higher. On the other hand, we saw a positive Sharpe measure, and y measure
helps us pick the different industry portfolios over the same industry portfolio.

6. Calculate Z score (latest year only) for each of the companies and
predict the bankruptcy situation

Z-Score
We use the Z-Score to predict and identify whether the company has a bankruptcy or any chance
of getting bankruptcy soon. As we know, Edward Altman, a professor at New York University,
discovered two models to check the company’s financial scenario. One model is using for a
publicly traded manufacturing firm, and another is using for a private firm and non-manufacturers.

Z-Score for Publicly traded manufacturing firm: we have to need some specific values, which are
EBIT, Total Asset, Net working capital, sales, market value of equity, book value of debt, and
accumulated retained earnings. If we get the Z score between 1.81 to 2.99, then we can say, yes,
we are 95% sure that this firm will be becoming bankrupt within a year. If that score is less than
or equal to 1.81, that indicates this company is already bankrupt. Moreover, if we get a Z score
greater than or equal to 2.99, we can ensure that the company does not have any risk of bankruptcy.

Z-Score for Private firms and non-manufacturers: we have to need some specific values, which are
EBIT, Total Asset, Net working capital, book value of equity, total liabilities, and accumulated
retained earnings. If we get a Z score of less than 1.23, that indicates this company is already in
bankruptcy. If the Z score is between 1.23 to 2.90, it denotes a gray area that means the company
is at high risk of bankruptcy. Moreover, if we get a Z score greater than or equal to 2.90, we can
ensure that the company does not have any risk of bankruptcy.

Below we present portfolio 1 (Similar industries) and portfolio 2 (Different industries) Z score
table and interpretation for 2020, and each portfolio contains five publicly traded manufacturing
companies.

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Portfolio-1 (Similar Industries)
Firm Name Z-score Range Interpretation
Johnson & Johnson 2.099 1.81 < Z < 2.99 We are 95% sure that this firm will be
becoming bankrupt within a year.
United Health Group Inc. 2.36 1.81 < Z < 2.99 We are 95% sure that this firm will be
becoming bankrupt within a year.
Pfizer Inc. 1.83 1.81 < Z < 2.99 We are 95% sure that this firm will be
becoming bankrupt within a year.
Novo Nordisk A/S 3.13 Z > 2.99 This company doesn’t have any risk of
bankruptcy.
CVS Health Corporation 1.87 1.81 < Z < 2.99 We are 95% sure that this firm will be
becoming bankrupt within a year.

From the above table, we can see that only NOVO Nordisk A/S company has no risk of
bankruptcy. In comparison, the other four companies have a 95% chance of becoming bankruptcy
within a year. So, they can hire a better finance manager and make a better management division,
and they would give a better idea to company owners how to get rid of bankruptcy.

Portfolio-2 (Different Industries)

Firm Name Z-score Range Interpretation
Halliburton Company 1.34 Z < 1.81 It indicates that this company is already
bankrupt.
Amazon 1.97 1.81 < Z < 2.99 We are 95% sure that this firm will be
becoming bankrupt within a year.
Tesla Inc. 1.63 Z < 1.81 It indicates that this company is already
bankrupt.
Microsoft 2.07 1.81 < Z < 2.99 We are 95% sure that this firm will be
becoming bankrupt within a year.
American Tower Co. 0.44 Z < 1.81 It indicates that this company is already
bankrupt.

From the above table, we can see these companies are not safe from bankruptcy. Only Amazon
has a 95% chance of becoming bankruptcy within a year. In comparison, the other four companies
are already bankrupt.

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Reference
1. Ross,Westerfield, Jordan - Corporate Finance, -McGraw-Hill Education (2018), 12th
Twelfth edition.
2. https://finance.yahoo.com/
3. https://finance.yahoo.com/quote/JNJ?p=JNJ&.tsrc=fin-srch
4. https://finance.yahoo.com/quote/UNH?p=UNH
5. https://finance.yahoo.com/quote/PFE?p=PFE&.tsrc=fin-srch
6. https://finance.yahoo.com/quote/NVO?p=NVO&.tsrc=fin-srch
7. https://finance.yahoo.com/quote/CVS?p=CVS&.tsrc=fin-srch
8. https://finance.yahoo.com/quote/HAL?p=HAL&.tsrc=fin-srch
9. https://finance.yahoo.com/quote/AMZN?p=AMZN&.tsrc=fin-srch
10. https://finance.yahoo.com/quote/TSLA?p=TSLA&.tsrc=fin-srch
11. https://finance.yahoo.com/quote/MSFT?p=MSFT&.tsrc=fin-srch
12. https://finance.yahoo.com/quote/AMT?p=AMT&.tsrc=fin-srch
13. https://www.youtube.com/watch?v=04KyLIqtmN0
14. https://www.youtube.com/watch?v=cotOY6IE29A&t=839s
15. https://www.youtube.com/watch?v=1n05jAiLx4o

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