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Introduction to Finance-BA Accounting & Finance

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Introduction

Portfolio creation is a very tough task because while doing so one needs to consider many factors. In the present study portfolio of 5 firms is prepared which are operating in different industries. In order to prepare a current portfolio some factors are considered like beta, firms earnings, growth rate of shares price in previous year etc. By taking in to account all these factors entire investment amount is allocated among different firms. Capital gain, expected share price and profit or capital gain on investment is also computed for the portfolio. In the second part of the report reasons due to which firms are selected in portfolio are discussed in detail. Along with this, reasons due to which firm will grow in terms of revenue and business are explained briefly. In this way, entire work is done in the report.

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(1)

Table 1 Allocation of funds among different firms in the portfolio

Initial investment

100000

Proportion to corpus

British petroleum (BP)

14310

14.31%

GlaxoSmithKline (GSK)

33580

33.58%

Antofagasta (ANTO)

30080

30.08%

BAE systems (BA)

13288

13.29%

WPP plc. (WPP)

8615

8.62%

Total

100000

99.87%

Table 2 Return and beta of firms taken in the portfolio

S.NO

Companies

Price

Return (%) y-o-y

Beta

Industry

1

British petroleum (BP)

477

37.15%

1.24

Oil & gas

2

GlaxoSmithKline (GSK)

1460

12.69%

0.62

Pharmaceutical

3

Antofagasta (ANTO)

752

70.25%

1.14

Mining

4

BAE systems (BA)

604

20.32%

0.86

Aerospace and defense

5

WPP plc. (WPP)

1723

13.80%

1.13

Communication services

Table 3Stocks and expected return as well as weight of different firms in the portfolio

Total investment target

100000

     
               

Companies

Price

Return (%) y-o-y

Beta

Stocks

Total investment

Expected return

Weight

British petroleum (BP)

477

37%

1.24

30

14310

46.02%

14.33%

WPP plc (WPP)

1723

14%

1.13

5

8615

15.57%

8.63%

Antofagasta (ANTO)

752

70%

1.14

40

30080

80.06%

30.12%

BAE systems (BA)

604

20%

0.86

22

13288

17.50%

13.30%

GlaxoSmithKline (GSK)

1460

13%

0.62

23

33580

7.95%

33.62%

Table 4Capital gain and value of investment

Companies

Price

Expected return

Stocks

Expected price

Capital gain

Current value

Total value at end

Total capital gain

British petroleum (BP)

477

46.02%

30

696

219.49

14310.00

20894.83

6585

WPP plc (WPP)

1723

15.57%

5

1991

268.21

8615.00

9956.07

1341

Antofagasta (ANTO)

752

80.06%

40

1354

602.02

30080.00

54160.72

24081

BAE systems (BA)

604

17.50%

22

710

105.73

13288.00

15614.01

2326

GlaxoSmithKline (GSK)

1460

7.95%

23

1576

116.03

33580.00

36248.80

2669

             

Total value of investment

136874

             

Total capital gain

37001

             

Return percentage

37.00%

(2)

  • British petroleum: Mentioned firm is the one of the largest oil and Gas Company of the UK. British Petroleum is currently operating its business in UK and other nations of the world where there is an availability of the higher amount of resources (Harris, 2013). Mentioned firm is mainly involved in exploration of crude oil from sea area. From this crude oil number of things are extracted which are used to produce varied sort of products. In current time period business firm is operating its business in to the three segments like upstream and downstream. In the upstream segment firm is involved in the exploration of oil and gas as well as transportation of same. Whereas, in downstream operations crude oil is produced and petrochemicals are extracted from oil. Hence, it is clear that these are the operations that firm perform in its business operations. Share price of the British petroleum will increase in the upcoming time period. This is because firm is attempting to explore new areas from where it can extract crude oil. Hence, in future production from the firm side will increase. Demand of crude oil is increasing which ensured that in the next financial year surely revenue of the firm will increase at rapid pace. In previous year, already share price of the British petroleum elevate by 37% which indicate that tremendous growth is observed on the firm shares. Thus, on the basis of past performance of shares, positive outlook in terms of demand and hope that global economy and UK will come on growth track it is anticipated that in the upcoming time period share price of British petroleum will increase. On the basis of return that are given by shares in previous year and risk free rate it is expected that share price will increase to 20894 from 14310. Hence, it will be profitable to make investment in British petroleum. Weight of 14.33% is given to mentioned firm in the portfolio because according to level of risk return is not obtained on shares. Hence, weight of only 14.33% is given to the British petroleum in the portfolio.
  • WPP plc.: WPP Plc is the company which is operating in the communication industry. Mentioned company is currently operating in varied segments namely advertising, media, relationship marketing and public relationship and public affairs (WPP plc. 2016). From these segments it is receiving huge amount of profit in its business. Currently, firm is operating its business in the 110 nations of the world. It is expected that in future firm share price will perform good. This is anticipated because it can be observed from the table given above that return of the firm in past years was 13.80%. It can be said that investors received a moderate return on the investment that they made in the firm. Beta value for WPP is 1.13. This reflects that if FTSE will increase by higher percentage than good amount of return will be earned on the invested amount. It is expected that good amount of return will gained on the shares of the WPP plc. This is because in current time period more and more firms are focusing on advertising their product through varied channels of communication. Hence, in upcoming time period demand for the firm service will increase. Moderate return is gained on the firm shares and it is expected that this return percentage will increase in the upcoming time period. Hence, on this basis it is estimated that in the upcoming time period moderate performance will be observed in the firm shares. Expected return on the WPP is 15.57% for the upcoming time period. Hence, moderate plunge will be observed in the firm shares. Due to this reason weight of only 8% is given to the firm in the portfolio.
  • Antofagasta: Antofagasta is the one of the UK largest firm that is operating in the mining industry. Mentioned firm is extracting copper and other materials. From these metals different by products are extracted. Apart from this firm is also operating in the transportation sector and it have its own fleet which is used to carry copper and other materials from mines to trains and warehouses vice versa (Antofagasta,2016). Firm revenue is highly dependent on the economic activities that are happened across the globe and in UK. If economy of the UK and other nations will improve the demand of cooper will increase. It is expected that in upcoming time period revenue of the business firm will increase at rapid pace. This is because UK economy is on growth track and its GDP will increase in the upcoming time period. This may lead to sharp elevation in the firm shares price. Hence, firm shares can give excellent performance if economy of the UK get increased in the upcoming time period. It is expected that in upcoming time period share price of the Antofagasta will increase at rapid pace. Share price may reach to 1354 from current closing price. Thus, there is a huge possibility of earning of good amount in the relevant company shares. Due to this reason 30% weight is given to the firm in the portfolio. Beta value is high which is 1.14 and this reflect that if FTSE index will increase then in that case firm share price will increase at repaid pace in comparison to index. Thus, it is clear that investment must be made in the Antofagasta.
  • BAE system: BAE system is the firm that is in the aerospace industry. Mentioned company is also providing security related solutions to the people. It is operating in the segment that consist of Cyber and intelligence solutions and applied intelligence (BAE system, 2016). It must be noted that with passage of time period aerospace industry is rapidly growing across the globe especially in the nations like USA and UK. Cybercrimes are increasing at a rapid pace and due to this reason demand for cyber related solutions is increasing. These are the two factors that will play a lead role in growth of the business firm. It is expected that in the upcoming time period firm will grow in its industry. In the previous year in the shares price of BAE system 20.32% growth was observed. This is tremendous plunge in the firm share price in the year. Beta value of the shares of the BAE system is 0.86 and this means that firm shares will not give return above the market. There are good prospect in the firm for the upcoming years. Return is given by the share according to the risk associated with it. Hence, on the basis of these three factors it is assumed that moderate growth will be observed in the share price of the BAE system. Expected share price is 710 which is above the current share price 604. Beta value is low which will prevent erosion of capital gain in case of short term fluctuations. Hence, on the basis of strong growth prospects and low beta value as well expectation of elevation in share price BAE system is included in the portfolio.
  • GlaxoSmithKline: Glaxosmithkline is the one of the leading pharmaceutical company that is producing varied sort of medicines. Currently, many projects are running by the firm in its medicines under which an attempt is made to introduce new generic medicines in the market. Mentioned firm is also producing API which is also known as active pharmaceutical ingredients (Yusuf and et.al., 2013). API are the ingredients of the medicines that play an important role in eliminating disease from the human body. Mentioned firm already applied for approval of some generic medicines that is produce in its lab in order to introduce in the market. Currently, firm is operating in number of nations of the world including India. Along with producing medicines firm is preparing API in its own factory. Hence, by selling API and medicines firm is earning huge profit in its business. With passage of time diseases are spreading at fast rate. Increasingly, people suffered from disease like obesity etc. By introducing relevant medicines firm is earning huge amount of revenue in its business. Many new projects are on pipeline and this reflects that in upcoming time period firm revenue will increase at rapid pace. Return percentage on shares was 12.69% and its beta value is 0.62. There are good growth prospects in the firm and beta value is moderate which means that in short term fluctuations prospective amount of capital gain will be moderately affected. There is a very high growth potential in the business firm and due to this reason it is selected in the portfolio. Expected share price is 1576 relative to current share price 1460. It can be said that in upcoming time period share price of the Glaxosmithkline will increase. There is a low risk and strong growth potential in the firm and due to this reason mentioned firm have 33.58% share in the portfolio.

Conclusion

On the basis of above discussion it is concluded that in order to earn good amount of return on the portfolio number of factors must be considered namely percentage change that happened in the share price in a year, beta value and firm earnings as well as strategy and business in which it is operating. By considering all these factors weight must be given to the firm in the portfolio. By doing so in balanced manner by managing risk profit maximization can be achieved on the invested amount.

References

  • Harris, J.M., 2013. Poly (ethylene glycol) chemistry: biotechnical and biomedical applications. Springer Science & Business Media.
  • Yusuf, Y.Y. and et.al., 2013. The UK oil and gas supply chains: An empirical analysis of adoption of sustainable measures and performance outcomes. International Journal of Production Economics, 146(2), pp.501-514.
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