Abstract
The aim of this report is to examine investment risk and returns by looking at the relationship between a stock and an index using the Markowitz Modern Portfolio theory. Monthly Data on IBM and Dow Jones were obtained from yahoo finance for the period 1995 to 2015. A linear regression was utilized to analyze the relationship between the Dow Jones index and the IBM stock returns. The results revealed that there is a positive relationship between IBM stock returns and the Dow Jones index. In their decision making, investors and policy makers are, recommended to additionally consider the micro and macro demand and supply forces that could possibly influence ROI in other to avoid or reduce risk.
Highlights
This article aims to demonstrate, in practice, the application of Markowitz's modern portfolio theory as an important tool for making investment decisions
THE MODERN PORTFOLIO THEORY (MPT) Harry Markowitz in 1952 published an article "Portfolio Selection" in the Journal of Finance, he developed a hypothesis which is an investment theory based on the concept that the risk-averse investors can develop their portfolios to maximize expected returns based on a particular market, Level of risk, emphasizing that risk is an inherent aspect of higher premiums
It can be concluded that there is a positive relationship between IBM stock returns and the Dow jones index
Summary
This article aims to demonstrate, in practice, the application of Markowitz's modern portfolio theory as an important tool for making investment decisions. This paper will discuss specific issues such as the review and framework of the MPT, risk and returns, expected returns, risk measurement and volatility and well as risk diversification It is based on the above highlights that this document aims to assist all investment owners and financial stakeholders to acquire knowledge and dealings of financial markets. This paper will focus on using the monthly returns of IBM stock from 1996 to 2015 to analyse Markowitz MPT using the Dow jones as the benchmark It is the aim of this paper to contribute to the pool of knowledge existing in investment decision making as well as academia on the above subject. The paper’s emphasis is on risk and returns focusing on the relationship between the monthly stocks returns of Dow Jones index and IBM using a liner regression model It analyses the modern portfolio theory as an investment tool.
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