The first test completed is the proportion of variability of each of the five stocks we first tested whether a relationship existed between each of the stocks and the market, looking for strong evidence of how these stocks have responded to the overall market’s change. Appendix A-3 summarizes the data between the each of the stocks changes to that of the overall market. While all of the stocks probabilities are high, Matria seems excessive to the point that the data collected from Matria did not provide enough information to conclude that there was a relationship between the company and the overall market. This is a good indication that the stocks had no relationship with how the market performed which indicates that these stocks may be worth the investment.

Risk, Return, and Sensitivity to the Market

Our analysis by investigating an aggressive approach to investing consisted of investing in one stock that has a high rate of return and a corresponding high risk. To determine which company to invest in, we first calculated the average return and risk of each of the selected stocks. The return of a company is the gain on the investment made. After reviewing Appendix A-1, we concluded that Wal-Mart had the highest rate of return. While it appeared that Wal-Mart would be the wisest investment due to its high rate of return, one must account for the tradeoff between return and risk. A high rate of return comes with a high level of risk. Investments with low levels of risk often provide more security on its investments. The type of investment depends on the investor’s individual preferences. For the aggressive investor, a stock like Wal-Mart that yields a high rate of return with a high level of risk seems attractive. Conservative investors will tend to make safer investments of their money. They would be more likely to choose a company similar to Pepsi that has a lower rate of return and less risk. The relationship between return and risk is further demonstrated in Appendix A-1.

Commonly, financial analysts compare the stocks that are being investigated to the market as a whole or to another type of investment such as the maturity Treasury bill. We did this by comparing each company to the S&P 500 index, an index that describes the market as a whole. Throughout the rest of the report we will refer to this index simply as the market. We measured the volatility of each stock relative to the volatility of the S&P 500 index. Referred to as beta, this calculation shows how each stock’s

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