To decide whether to add AEI or AG to a client's passive index portfolio, assess the stocks' expected returns, beta values, and standard deviations against the client's risk tolerance and portfolio composition. Historical data shows that dividends have decreased since the 1990s, with capital gains being the main source of returns. AEI's lower beta might appeal to risk-averse investors, while AG's higher return could attract those willing to take on more risk.
When considering whether to add stocks like Atlas Electrical Industries (AEI) and Andros Grill Ltd (AG) to a client's passive index portfolio, several factors must be taken into account including expected rate of returns, beta values, dividend yields, and standard deviations. AEI's expected rate of return is 11%, with a beta of 0.7, while AG's expected return is 14%, with a higher beta of 1.5. The beta indicates the stock's volatility in relation to the market; therefore, AG is more volatile. You must also consider risk tolerance and existing portfolio composition.
According to historical data, the total annual rate of return on the S&P 500 index includes both dividends and capital gains, but since the 1990s, dividends have dropped to about 1% to 2%. The past performance indicates that capital gains have been a larger contributor to total returns than dividends since the 1980s. Therefore, a client with a passive index portfolio that tracks the overall market might already be optimally diversified in terms of the historical trade-off between capital gains and dividends.
Evaluating the current yields and growth rates, along with the risk as indicated by standard deviation and beta values, it's important to consider the Bahamian client's specific financial goals and risk tolerance. AEI's lower beta may be suitable for those seeking lower volatility, whereas AG's higher expected return may be attractive for those willing to accept higher risk. Nevertheless, individual stocks can bring sector-specific risks and greater volatility compared to a well-diversified index fund.