Date on Honors Thesis

Spring 4-25-2024

Major

Finance

Examining Committee Member

Dr. David Durr, Advisor

Examining Committee Member

Professor Christopher Wooldridge, Committee Member

Examining Committee Member

Dr. Leiza Nochebuena-Evans, Committee Member

Abstract/Description

The major goal of this research was to investigate how the returns of a portfolio containing only the 10 largest stocks in the S&P500 index, based on market cap, would compare to the overall index’s return and volatility over multiple time frames. This project investigated whether a portfolio of the 10 largest stocks in the S&P500, at the beginning of each year, would be considered superior in terms of returns while not unproportionately increasing volatility. First, the SPDR S&P 500 ETF Trust, or SPY, was selected as the S&P500 index measure and was used to evaluate the index’s returns. Second, the largest stocks in the index for each year between 2016 and 2022 were selected and each of their market capitalizations at the beginning of that year were measured as a percentage of the total index’s. Returns for each stock, for each month, were then sourced from a database provided by faculty at Murray State. Two different test portfolios were then generated containing the largest 10 stocks for each year, only differing on how the ten largest stocks were weighed. Finally, the Invesco S&P 500 Top 50 ETF (XLG)’s returns were also calculated to determine how a portfolio containing the 50 largest stocks in the index would perform compared to the index and the test portfolios. Since the XLG is comprised of only the 50 largest stocks in the S&P500, it may give us a good measure of how powerful the ten largest stocks are, even in comparison to the other 40 largest firms. Once all the returns of the four portfolios had been collected, the index and test portfolios’ return, betas, and standard deviations were calculated and compared to find results. After comparing the test portfolios with the SPY, what was discovered was that during 2016 through 2022 a portfolio containing the 10 largest stocks in the S&P500, as measured at the beginning of each year and weighed in accordance with each stock’s index weight, would produce the best possible returns of any portfolio analyzed, but would increase the portfolio’s standard deviation and beta. After running a risk-adjusted analysis, what ultimately was discovered was that while the portfolios containing only the largest stocks did experience larger returns during the 7 years, that on a total risk-adjusted basis, they produced less returns per unit of risk taken. This was concluded to be because of the portfolios’ lack of diversification, which no matter its larger returns, could not outperform that of the market when accounting for its volatility. Finally, to demonstrate that there are still benefits to these types of portfolios and the increased returns they can generate, I ran a new scenario analysis, ending the study after 2021.

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