Forecasting and Risk-Return Analysis: Verizon Communications
Answer 2)
In order to estimate the risk factor employed in the Verizon’s stock, we conducted a regression analysis using the daily return of Verizon stock as a dependent variable and daily return of S&P 500 index as an independent variable for the period of January, 2012 to December, 2014. Below are the results output:
Analysis
Referring to the regression results, we found the R-square multiple at 21.02%. Important to note, the R-square multiple, which is also known as coefficient of determination spells out the percentage of the daily return of Verizon stock that is explained by the daily return of S&P 500 index. Therefore, R-square multiple of 21.02% indicates that Verizon stock does not act much like S&P 500 index. Hence, adding this stock to the portfolio will provide diversification benefit as majority of the risk embedded in the stock is non-market risk.
As for the X-Variable Coefficient, the multiple indicates the beta measure. Beta is the measure of volatility or market risk exhibited by the company. For instance, Beta measure of greater than 1 means that the stock has more market risk, and the changes in the stock price volatility are closely related to the movement of market index prices, vice versa. Here, we see that Verizon has beta measure of 0.34, which indicates that the stock has low systematic risk, and the returns are not highly correlated to that of market index.
Thus, considering the R-square and beta multiple we can assert that the stock exhibits low market volatility, and with greater proportion of unsystematic risk in the stock, an investor can earn diversification benefit by including Verizon stock in his portfolio.
Part c)
In the paper, we analyzed the financial standing of Verizon Communication by putting the raw financial data for past 4 years under the microscope of ratio analysis. Our analysis indicated that the company is standing up to its brand image, and has achieved impressive revenue growth over the years, and we expect it to continue in the coming years. Moreover, the surge in the debt-equity ratio of the company can be contributed to company’s steps towards achieving 9.15% growth in 2015. In addition to the above, the efficiency of the management is also spelled out by the high inventory turnover in comparison to its rival firm, AT&T Inc. This indicates that it takes relatively less time for the company to sell their inventory, and capital is freed up quickly, thus subsequently improving cash conversion cycle
Overall, we believe that Verizon Communication will continue to grow in the coming years, and investors will see strong growth in the revenue and profit figures of this telecommunication giant.
Works Cited
R-square multiple. n.d. 20 April 2015 <http://www.investopedia.com/terms/r/r-squared.asp>.
