08/30/2023
Financial analysis using historical data of stocks can reveal interesting information, patterns, and can be also used (always with caution) as a guide for a portfolio setup.
When building a portfolio, people tend to define two important variables. First, they usually want to diversify and second, the try to control the risk-return tradeoff (i.e., more risky assets tend to return higher returns while low risk assets like bonds, tend to return low returns).
Diversification is trivial and can be done by adding assets from different sectors / industries. However, assessment of the risk-reward tradeoff is usually overlooked.
In this article, I explain how someone can apply and use the Capital Asset Pricing Model (CAPM) to assess the risk-reward variable. We will start by pulling the historical prices of some stocks, then do some exploratory analysis on their return and finally, apply the CAPM to estimate their expected risk-adjusted return.
