The companies chosen for this portfolio are Coca-Cola HBC AG (CCH.L) and Shell PLC (SHEL.L). Coca-Cola HBC AG is in the beverage industry, while Shell PLC is in the energy and petroleum sector (“Coca-Cola HBC AG ADR (CCHGY),” n.d.). The ever increasing demand for non-alcoholic beverages led to the focus on the beverage sector. Non-alcoholic beverage sales have risen in recent years, mirroring the growing concern among consumers about their health. On the other hand, the energy and petroleum industry was chosen specifically because of its current difficulties (“Shell PLC (SHEL),” n.d.). Cyber-attacks, environmental consequences, climate change, and the concentration of financial power are some of the problems this sector faces.
Modern Portfolio Theory and Relevant Concepts
With annual sales of almost 2 billion unit cases, Coca-Cola HBC AG, also known as Coca-Cola Hellenic Bottling Company or just Coca-Cola Hellenic, ranks as the world’s third-largest Coca-Cola anchor bottler. In addition to its primary listing on the London Stock Exchange, Coca-Cola HBC’s stock can also be found on the Athens Stock Exchange. The stock of this corporation can be found in the FTSE 100 (“Coca-Cola HBC AG ADR (CCHGY),” n.d.). Additionally, Coca-Cola HBC is featured in both the Dow Jones Sustainability Index and the FTSE4Good Index, and it was voted the industry leader among beverage businesses in 2014.
Shell PLC is a global oil and gas company with headquarters in London. The London Stock Exchange (LSE) is Shell’s primary listing, with secondary listings on the Euronext Amsterdam and New York Stock Exchanges. Shell, a pillar of Big Oil, is among the world’s largest firms regardless of sector and is the second-largest investor-owned oil and gas company by revenue in the world (behind ExxonMobil) (“Shell PLC (SHEL),” n.d.). Between 1988 and 2015, Shell was the ninth greatest corporate producer of greenhouse gas emissions, based on its emissions and the emissions of all the fossil fuels it sells (“Shell PLC (SHEL),” n.d.). This is an indication that the company has a significant impact on the environment.
Stocks and Portfolio Statistics: Daily Percentage Price Returns
Intraday returns comprise two parts, one of which is the daily percentage price return. The intraday return of a stock is calculated by subtracting the opening price from the closing price it experienced throughout the trading day and dividing it by the opening price, then multiplying it by 100 (Ftiti et al., 2021). The total daily return from a stock is calculated by adding the intraday return and overnight return, which are based on a stock’s price movement between the closure of one trading day and the close of the next trading day. It is also known as a daytime return for apparent reasons.
The daily percentage price returns were determined by compiling price information for Coca-Cola HBC AG and Shell PLC from online databases covering the previous 30 trading days (see Table 1&2). CCH.L has a 0.43 percent daily average price return and a 1.02 percent standard deviation, while SHEL.L has a 0.19 percent daily average price return and a 1.15 percent standard deviation (see Table 3&4). CCH.L has a more significant average percentage price return and a lower standard deviation, indicating superior performance to SHEL.L.
Table 1: Daily Percentage Price Returns for CCH.L
Table 2: Daily Percentage Price Returns for SHEL.L
Table 3: Average and Standard Deviation for Daily Percentage Price Returns for CCH.L
Table 4: Average and Standard Deviation for Daily Percentage Price Returns for SHEL.L
Covariance and Correlations
In most cases, using covariance to analyze a portfolio can assist in revealing which assets should be included. Determines if stock prices tend to move in the same direction (positive covariance) or opposite directions (negative covariance) (negative covariance) (Fiszeder et al., 2019). Using Excel’s COVARIANCE.S function for SHEL.L and CCH.L daily percentage price return, it was found that the covariance of this portfolio is -0.329788424. When this value is negative, the stock market tends to follow suit. Therefore, when CCH.L’s return was low, SHEL.L’s return was likewise low.
The degree to which the price of two equities rises or falls together can be described by their correlation. Stocks’ links with other asset types, including bonds and real estate, can also be discussed (Fiszeder et al., 2019). Excel’s CORREL function yielded a correlation of -0.274903616 for this investment mix. It can be argued that the two stocks have a low negative connection because the correlation value for the portfolio is negative. That is why there will be days when one stock goes up and the other goes down.
Average Daily Return and Standard Deviation of the Portfolio of two Stocks
Following the calculation of the average daily return and the standard deviation of the portfolio consisting of two stocks, with a weighting of 50% allocated to each stock in Excel, the results showed that the average was 0.31% and the standard deviation was 1.085%. This is a sign that any investor who invests in both stocks should anticipate a daily return on investment of 0.31%, with a range of 1.085%. Due to these values, an investor can consider investing in the two stocks.
Interpretation of Findings and Recommendations
According to the daily percentages of price return calculated for both equities, CCH.L is now performing significantly better than SHEL.L. CCH.L offers more significant daily percentage returns, which is why this is the case. As a result, I would advise any potential investor considering purchasing either of the stocks to focus on CCH.L rather than the other stock because it will guarantee a more significant return on investment for them.
A calculation of the two stocks’ covariance has shown that when one stock has low returns, the other stock will likewise experience bad returns. This was discovered as a result of the computation. Even though the two companies come from distinct industries, their respective markets’ tendencies are very similar. There are a variety of possible causes for this, including the economic downturn that began with Covid-19. In addition, the two portfolios have a negative correlation, indicating that they are similarly affected by market changes. Consequently, I advise potential investors to purchase these stocks and divide their investments fairly.
If an investor decides to invest in the two stocks, they will earn a daily return of 0.31% at a range of 1.085%, according to the average daily return and standard deviation of the portfolio of the two stocks. The combination of the two stocks reveals this information. As a result, this indicates that an investor in the two stocks will have made a good investment. Therefore, I would advise purchasing shares of both companies.
The portfolio’s risk returns increased from 0.19% to 0.43% over the same period. On the other hand, the risk of both begins to decrease and then gradually increases until the weight of both equities reaches 50%. As a result, I would suggest that investors avoid investing in both stocks when the weight of CCH.L is less than 50% of the total. The investor will receive minimal returns for taking on a large risk.
Conclusion
Although the two stocks come from different industries, they are affected in the same way by the trends occurring in the market. If the market trend has a negative impact on one stock, that impact will be replicated similarly on the other stock. The average daily percentage return is a further indicator of whether a stock performs better than the other. This is a clear sign that, despite having a similar reaction to the movements in the market, there is one stock that is always superior in terms of performance. In a general sense, the extent to which these two equities are affected by the developments in the market is comparable.
References
Coca Cola HBC AG ADR (CCHGY) (n.d.). Investing.com. Web.
Fiszeder, P., Fałdziński, M., & Molnár, P. (2019). Range-based DCC models for covariance and value-at-risk forecasting. Journal of Empirical Finance, 54, 58–76. Web.
Ftiti, Z., Ben Ameur, H., & Louhichi, W. (2021). Does non-fundamental news related to COVID-19 matter for stock returns? Evidence from Shanghai Stock Market. Economic Modelling, 99, 105484. Web.
Shell PLC (SHEL) (n.d.). Investing.com. Web.