Using a Strategy Consisting of Market Capitalization and Moving Averages to Analyze the Performance of Three Investment Models for a 3-Month Period

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English, Jackson
Barnett, Matthew (Matt)
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Scholarship Sewanee 2023 , University of the South , Financial portfolio analysis
Using three different models, Portfolio Theory, Capital Asset Pricing Model, and Fama French Three Factor Model, we invested in five stocks to maximize profits and minimize risk. We decided to invest in one stock with high rewards while being less concerned with the risk that came along with the stocks. To minimize risk in our portfolio by investing in two stocks with low risk but still a positive historical reward. We then invested in two stocks with medium reward and a medium amount of risk. By using the three different models and with the use of R-Studio, we were able to create the best possible portfolio of the five stocks. By finding our optimal weights, risk vs reward graphs, capital allocation line, over or undervalued stocks, and macroeconomic developments, we were able to make informed and logical decisions regarding the portfolio in its entirety. Our optimal weights are the optimal percentage that each stock should have to get the portfolio with maximized profits and decreased risk. The risk versus reward graphs displayed the amount of return and the amount of risk that each stock has. The over or under-valuations of our stocks allowed us to make more informed decisions on the individual weights of each stock. The Fama-French three-factor model also tells us how each stock is correlated to the three factors in the model. With the unstable market making it difficult for the models to predict the future of our stocks correctly, we also analyzed our stocks individually. We wanted to see which stocks had a higher market capitalization to provide more stability from market factors. A high market capitalization would also show the history of the business and how it has performed in the past. Overall, we were pleased with the optimal portfolio, but we considered the amount of risk that the portfolio takes on, so we decided to decrease from one of our riskier stocks and put it into a safer stock with more stability.