In this series, we are going to value the common equity shares of Wells Fargo (WFC), U.S. Bancorp (USB) and PNC Financial (PNC). In this article, we'll analyze these firms from a portfolio management perspective. We'll take a look at the geometric mean monthly returns, monthly variance, monthly standard deviation and correlation with the market. In the next article, we'll conclude this series on financial firms with conclusions and recommendations. In the previous article, we analyzed the economic dynamics impacting the financial sector.
For the most part Wells Fargo's monthly returns are inside of +/-30 percent.
PNC is less volatile than Wells Fargo, and most of its monthly returns are inside of +/-20 percent.
U.S. Bancorp is less volatile than Wells Fargo, and most of its monthly returns are inside of +/-10 percent.
Most of the S&P 500's monthly returns are inside of +/-10 percent.
Monthly Mean Return
All three firms have positive geometric mean monthly return. Well Fargo's geometric mean monthly return is 0.38 percent. U.S. Bancorp's geometric mean monthly return is 0.44 and PNC's is 0.23 percent
Variance is a measure of the volatility or dispersion of returns. The higher the variance, the less predictable the returns and the more risky the investment.
Between 2006 and now, Wells Fargo has the highest variance followed by PNC and U.S. Bancorp. In other words, U.S. Bancorp should provide investors with the most predictable returns.
Standard deviation is a measure of the volatility of an asset. Between 2006 and now, the standard deviation of Well Fargo's monthly returns is 11 percent. The standard deviation of U.S. Bancorp's monthly returns is 8.2 percent. The standard deviation of PNC's monthly returns is 9.7 percent.
In the period between 2006 and now, Wells Fargo and U.S. Bancorp were the least correlated with the S&P 500 (SPY). However, all of the firms are strongly correlated with the market. That said, Wells Fargo and U.S. Bancorp would provide the most diversification benefits.
All three firms are investment grade. Traders may want to look elsewhere for returns.
To be continued...
Disclaimer: This article is not meant to establish or continue an investment advisory relationship. Before investing, readers should consult their financial advisor. Christopher Grosvenor does not know your financial situation and ability to bear risk and thus his opinions may not be suitable for all investors.