Do you have an assignment in which you have to analyse which stock is better out of two? Are you also stuck in writing an answer like hundreds of other students? Do you not know how to conduct quantitative data analysis and use CAPM? Then bid your worries goodbye because this blog is about how to do that.
This is Andy Johnson and you and I are going on a ride to learn how two stocks are compared and what is written in the assignment answer.
What is the question?
The question to analyse two stocks and then suggest which one is better to an investor is a common assignment problem. You might be wondering why are you doing this? Well, what do you think about the guys at Wall Street? Do you know how they earn so much money? By selling stocks, exactly.
And how do you think you will be able to sell stocks if you do not know which one the client should invest in, eh? If you suggest me to invest in stock A with a blind eye and I lose my money, will I ever come back?
That is why you are learning to that through this assignment. Think of it as an exercise.
What should your approach to solving this be?
When you are attempting the questions asking you to compare two stocks, you need to take care of one most primary things. Believe me, if you are able to present this section really well in your report, then you are going to become the next Jordan Belfort. What is that secret recipe?
You have to compare the risk and return relationship of the two stocks over time.
What weapons will help you in this war?
This battle is not an easy one. You need to wield some powerful weapons that were forged by Odin himself. These weapons will help you win this assignment.
- Just like Odin’s spear Gungnir never misses its target, you have to prepare yourself with the quantitative data analysis skills which never miss even a detail.
- Dainsleif is a magical sword that inflicts a wound which never heals. Such is also the power of the CAPM. If you calculate wrong returns, then the wound inflicted to the investor is never going to heal.
- Gleipnir, a chain made of things that do not exist, is a chain that cannot be broken. Quantitative techniques, if not used correctly, can bind your investor in a loop that cannot be broken. Therefore, you should know how and when to use the different quantitative techniques.
How to compare stock returns?
This is a time-taking process, the one which requires deep understanding. You need to calculate the stock returns after going through a series of steps.
Let us assume that you need to compare the stock returns of International Business Machines (IBM) and General Electric (GE).
The first thing while comparing any stock is to download the data from the local marketing index. For example, I am using IBM and GE. They are American companies so the marketing index applicable to them will be the S&P 500 Index.
Once you have downloaded the data from the S&P, you have to extract line charts for both the stocks.
This is what the S&P chart for IBM looks like –
This is GE for you –
You need to now take the dive and calculate the returns for the series of stocks that you selected. Remember, do not exclude the dividends paid unless specified in your assignment question.
Once you have calculated the returns, prepare summary statistics along with the histograms. This will help you to further analyse each of the returns distributions.
To give you an idea of what this summary statistics will give you, here is a sample to refer to.
This is from a BUS5SBF assessment 2 answer.
When you have prepared this summary statistics, you need to interpret these results to the client. In your case, it is the professor. You have to clear, straightforward and honest with what you found. If the investor cannot take one, they are not ready to take the risk.
This is what an honest interpretation looks like –
Hence, conclude if IBM stocks are riskier than GE stocks or not.
It is not as easy as it looks.
If by seeing the reference insight I gave you is giving off the vibe that you can take it on yourself, then let me be honest with you as well. It is not as easy as it seems.
Trust me, I am a professional finance assignment writer and it took me a thorough investigation and analysis to write this one. Since then, I have done so many assignments like these that I can provide you with a solution with a blind eye.
What should you do? You should send me your assignments and I will give you a 100% original and unique assignment solution!