OBJECTIVES / RESEARCH METHODS:

The main objective of this study was to use two dividend-paying stocks to see how much we should invest in them to create the most optimized portfolio between the two companies. For this study we decided to use two of the major leaders in their respective sectors, Wal-Mart in consumer staples, and Microsoft in technology. We began by collecting the monthly closing stock prices with dividends incorporated over the last 61 months for Wal-Mart, Microsoft, and the S&P 500 index. We also found the monthly yield on a 30-year T-bond to also use as a comparison for our two stocks. Once we collected all of these findings we were able to calculate various risk and return measures that we would use later when forming our portfolio.
RESULTS:
Since 2008 we found that there has been a gradual rise in the stock prices for both Microsoft and Wal-Mart. At the end of 2008, they were trading at $17.10 and $49.73 respectively. As of December 2013, they are now trading at $37.41 and $78.69, which are both significant rises since five years ago. After finding the closing monthly stock prices for Wal-Mart, Microsoft and the S&P 500, as well as the monthly yield for a 30-year T-bond, we took their average for each to find the expected return. Respectively for Microsoft and Wal-Mart we found the expected returns were 1.54% and 0.88%. For Microsoft this is well above the benchmark of the S&P’s expected return, which was 1.30%, while for Wal-Mart it is well below the benchmark. We also found that Microsoft and Wal-Mart’s expected returns are higher than the average monthly yield of a 30-year T-bond, which is good because it shows they are outperforming a risk free asset. Following our calculation of expected return we went onto other risk and return measures like variance and covariance. The variances of Microsoft and Wal-Mart are 0.47% and 0.23%, which are both higher than the S&P 500’s variance of 0.21. We also found that the 30-year T-bond variance is 0.31%, lower than Microsoft. We then calculated the covariance between Microsoft and Wal-Mart, as well as the covariance between each stock and the S&P 500. This is a measure of disparity which shows whether or not the asset returns are moving together. We found that all the covariance’s we measured are relatively low as for Microsoft and Wal-Mart it was 0.000846. After finding the covariance, we were then able to calculate beta using 1 as the benchmark, which is also the beta for the S&P 500. We found that Microsoft’s beta was 0.951963, just under the benchmark, while Wal-Mart’s was .40311831, well below the benchmark. Finally, for risk and return measures we calculated the correlation for each stock and the S&P 500. Respectively for Microsoft and Wal-Mart, the correlations were 0.6383431 and 0.3880727, both below the benchmark of 1. Once we were done calculating the risk and return statistics, we then formed our portfolio with Microsoft and Wal-Mart, with the weights adding up to 100%. Our first portfolio had Microsoft weighted at -25% and 125% for Wal-Mart. We changed the weights for each portfolio by increments of 5% till Microsoft would be weighted at 125% and Wal-Mart at -25%. We found that the most optimal portfolio was the one where Microsoft was 45% and Wal-Mart was 55%. We figured this out by looking at the Sharpe ratio, which was higher than any other portfolio at 0.338600548. This portfolio would be the closest point on the Capital Allocation Line. We also found that maximum return for each portfolio would be the one where Microsoft is weighted at 125% and Wal-Mart is at -25%. This however, is not the most optimal portfolio according to our Sharpe ratio calculations.