Constructing an equally weighted stock portfolio based on systematic risk (beta)

(1) Adlai E. Stevenson High School, Lincolnshire, Illinois

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Many people worldwide make investments in different categories, especially stocks, to save and gain more money. The purpose of this study was to show the relationship between the beta (a measure of systematic risk) and returns on selected stocks from six different industries. Besides that, our goal was to determine if, while building a long-term portfolio, picking stocks from various sectors is efficient enough to outperform an overall market. We selected stocks from six industries - technology, pharmaceutical, energy, automobile, banking, and consumer staples sectors - from 2006 through 2020 for comparison. We calculated beta for each stock and sector using the Capital Asset Pricing Model (CAPM). These results were consistent with the hypothesis and demonstrated that above-average beta stocks from most sectors showed higher returns than below-average beta stocks and the market. Sector-wise, compared to the market and low beta stocks, higher beta stocks in the technology, pharmaceuticals, and consumer staples sectors displayed higher returns. Whereas in the automobile and energy sector, above-average beta stocks did perform better than lower beta stocks; however, they underperformed compared to the market. In the banking sector, above-average beta stocks did not perform very well. Overall, these results suggest that using above-average beta stocks from different sectors could be a viable way to build a profitable stock portfolio. Our model’s uniqueness is to balance the total portfolio, reducing risk not to drop drastically even if few sectors fluctuate by calculating a systematic risk beta for each sector and each stock within the sectors.

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systematic risk beta capm stock portfolio s&p 500