For this work, it is assumed that shares were bought from two companies: McDonald’s and Coca-Cola, on February 23, 2022. The current count is taken from the available date of June 1, which is 98 days between dates. The total and annual percentage returns are shown in Table 2, which demonstrates the return on the portfolio. It should be noted that the portfolio is represented by only two stocks, which are a little diversified in a broad sense, as they represent related business sectors. In reality, portfolios contain a much larger number of stocks, allow for bonds, and require more complex macro-environment analysis and statistics. Nevertheless, in this work, these shares are considered according to the assignment.
A slight change in the range can give diametrically opposite results, indicating volatility but, at the same time, the efficiency of the market. Any changes are instantly reflected in the value of the securities. These shares were chosen because of cooperation and, accordingly, have an indirect relationship. The current market can be considered bearish due to the onset of the global economic crisis and conditions of uncertainty, and many stocks have begun to fall, while the above ones are still showing growth if fluctuations are left out of the brackets.
Table 2. (Macrotrends, 2022a; Macrotrends, 2022b).
This percentage is relatively low due to the high volatility of the share prices of these two companies. On average, they experience extreme points several times a year, with a wide amplitude (Macrotrends, 2022a; Macrotrends, 2022b). Nevertheless, the inflation rate in Canada is currently 6.8%, which is about 85% of the result obtained (Evans, 2022). Inflation is triggered by the global economic crisis and is the largest in more than thirty years of statistics (Evans, 2022). The portfolio, as a rule, has a larger volume and diversification of assets, which, even in weighted average calculations, can give a higher percentage. With the high volatility of the shares presented, this calculation has a higher high error, which iterative approaches can eliminate for calculations during the rise and fall of stock prices.
However, at the moment, inflation is well below profits. Therefore, such volatile markets can be a reliable source of income in conditions of uncertainty; their fluctuations will always be more significant than most other stocks on the market. Due to these micro-changes, an investor can minimize the risk by being able to sell shares while observing the general trend of the markets to fall but the growth of the selected company. However, it is worth relying on a more complex picture of factors.
Compared to the S&P/TSX Composite index, this portfolio looks more advantageous. The annualized return of this index is 1.12%, which is almost seven times less than this indicator in the portfolio (S&P/TSX Composite Index, 2022). Given that this index is fundamental to the Canadian stock market and reflects significant trends, including market capitalization and earnings confidence, the indicator shows a gradual decline in the economic potential of the markets. However, with rising inflation, portfolio percentages can still be considered low. Each return is higher than the index since the selected stocks have more volatility than the index, backed by many factors, and therefore the difference can change significantly in the short term.
Coca-Cola is a strong, recognizable brand that keeps its stock prices from falling below a certain level. However, global trends primarily related to health and the environment provide the most significant volatility. For example, success in activities to achieve a sustainable business makes stocks more attractive to investors. At the same time, media events with the famous footballer Cristiano Ronaldo’s demonstrative rearrangement of bottles at a press conference may provoke a significant drop (Chaturvedi, 2021). McDonald’s, in turn, is more dependent on global factors affecting the ability to visit and order in restaurants. Stocks last saw significant declines during the height of the pandemic due to temporary restaurant closures (Macrotrends, 2022a). The decline is observed now, perhaps due to the complicated geopolitical situation in Ukraine and Russia, where the company was forced to lose markets. However, the geographic potential has not yet been exhausted, and cooperation with delivery aggregators established during the pandemic suggests increased revenues.
Uncertainty conditions create the basis for a potentially high return with a proportional risk increase. In choosing the stocks in question, I was guided by the principle of a significant deviation from the high point in the case of Mcdonald’s, which, with a long-term investment, should undoubtedly generate a return. Coca-Cola, in turn, showed stable growth, which, with inevitable volatility, continued over the following months. Companies survived the pandemic crisis and still restored the lost extremum points, which naturally should have reached the previous values due to the regeneration of the markets. Considering the strength of the listed companies’ brands, the reliability of investments was relatively high but did not promise significant gains in the short term.
Consequently, if I were to choose two other stocks for the portfolio, I would follow the same principles, as I expect long-term and constant returns that will be less commensurate with the risks. To reduce risk, an investor should always turn to companies that have been on the market for a long time, evaluate the geopolitical and trending agenda on a global scale, and evaluate the frequency of extreme points. Knowing the approximate amplitude of volatility can save an investor from instant emotional decisions.
References
Chaturvedi, A. (2021). Coca-Cola responds after Cristiano Ronaldo gesture wipes off $4 billion from its market value. Hindustan Times.
Evans, P. (2022). Canada’s inflation rate inches up again, to new 31-year high of 6.8%. CBC News.
Macrotrends. (2022a). McDonald’s – 52 Year Stock Price History | MCD.
Macrotrends. (2022b). CocaCola – 60 Year Stock Price History | KO.
S&P/TSX Composite Index. (2022). Web.