Goldman Sachs Group Stock Portfolio

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9) Stock A is the Goldman Sachs Group. Over the past 5 years, the company has managed to generate an average return of 1.507%. In comparison to the average rate of return of S&P500 over the same period, which was 0.924%, it can be stated that Goldman Sachs performed well in the stock market.

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The graph above depicts the relationship between Goldman Sachs’ stock price and the S&P500 index from March 15th, 2012 to March 15th, 2017. It is clear that the slope of Goldman Sachs’ stock was greater than the slope of S&P500 index, meaning that its stock price increased at a greater rate than that of the S&P500 index, thus proving that the company outperformed the S&P500 over the past 5 years.

In order to determine the relationship between the charts, a statistical measure called correlation can be used. The correlation between Goldman Sachs’ stock and the S&P500 index over the past 5 years was 0.63291. This positive correlation between the two sets of data indicates that they tend to move in the same direction. A correlation of 0.63291 implies that Stock A’s performance was not entirely related to the the overall stock market. In certain months, Goldman Sachs’ stock market performance was opposite to that of the economy’s performance. However, in general, the company performed well when the overall economy (S&P500) performed well, which is what the chart depicts.  

10) The average and median returns of GS are 1.510% and 1.730% respectively, while those for the S&P500 are 0.920% and 1.080% respectively. Over the past 5 years, the average return on Stock A has been lower than the median return, indicating that there were certain months that generated extremely low returns that had a drastic impact on the average, but minimal impact on the median. This is because an extreme outlier will skew the value of the mean, but not the median, because the magnitude does not matter. The average and median returns for GS are also higher than that of the S&P500, which coincides with the findings in (9) that show better performance for the company than the average of the 500 companies. Goldman Sach’s stock had a maximum return of 23.410% on the month of November 2016 and a minimum return of -16.494% on May 2012. These numbers hence affect the average but not the median, therefore the median is a more accurate method (removes the weighted effect of the outliers) of comparing the returns from stock A to the those of the S&P500. The average return for JPMorgan is 1.600% and the median return is 2.820%, both of which are even higher than Stock A. This indicates that while GS outperformed the market, JPM did even better as their returns was even higher than those of GS.

11) Suppose you used the monthly “close” price instead of “adjusted close” price. How would the average monthly returns change? What would this depend on?

The monthly close price is just the closing price at the end of the trading day. It includes only changes in the price of the stock resulting from capital gains/losses. Adjusted close, on the other hand, also factors in dividends and also other events such as stock splits, account distribution, and corporate action. For example, when a dividend is paid out, the adjusted price will equal the closing price less the amount of the dividend because it was a future cash flow that was cashed out. When investors calculate returns, they use the adjusted close price rather than the close price, because the return on their investment should include the amount that they receive in dividends, as well as the amount in capital gains/losses. If they used the close price, the average monthly returns would decline, which can be proven by calculating the returns based on close price and taking the average. That being said, this change in returns would only occur under the assumption that the company is paying out dividends. The larger the dividend, the greater the decrease in monthly returns if the close price were used instead of the adjusted price. If no dividends are being paid out, then the close price and the adjusted price would be close enough in value that the change in average monthly returns is negligible, if anything, and any significant changes would be attributed to other events.

12) According to the data, Goldman Sachs has the highest standard deviation of 7.029% while JPM takes second place at 6.442%. The standard deviations of the portfolio and S&P500 both are 6.530% and 2.937% respectively, both of which are lower than any of two individual companies. Standard deviation is regarded as an index in evaluating the risk of the stock since it indicates the variation in returns. The higher the standard deviation is, the higher the risk is. This is because high standard deviation means that price action is volatile and unpredictable, which creates uncertainty. Therefore, S&P500 is safest as it yielded the lowest standard deviation, while an investment in Goldman Sachs is riskiest because it has the highest standard deviation. However, it is critical to note why S&P500 has a lower risk. Since S&P500 consists of 500 companies, the price, and hence standard deviation, will be steadier as some of them may rise while others may fall, which creates less uncertainty overall. Therefore, the money is spread out across all industries (the eggs are all in separate baskets)  if the investment is made in S&P500.

The max and min values do not give the same comparison as the standard deviation. For the difference between max and min values, Goldman has the biggest difference (39.906%) while S&P500 has the smallest of 11.235%. JPM takes the second place with a difference of 22.194%. For the S&P500, it has narrow range since it comprises of the highs and lows for all 500 companies combined. As a result, it has the lowest risk compared to any other individual company, which is shown in the low standard deviation value. However, the methodology behind these two ways of comparing risks are different. Standard deviation is a measure of how much each return varies from the average value, whereas the max and min simply show the highest and lowest points during a given timeframe. The standard deviation represents the volatility and the variability of the stock’s return as a whole, while the max and min do not. They are not an accurate indicator for this, because they can be attributed to a one-time event (single occurrences are outliers). Although the difference between maximum and minimum value can also indicate the  volatility of the stock, the standard deviation is more comprehensive and thorough because it takes into account all returns over a given period of time.