Goldman Sachs or Blackstone

         The Goldman Sachs Group is a global investment bank, that provides financial services to clients such as corporations, individuals, government entities, and financial institutions. Goldman Sachs is headquartered in Manhattan and was founded in 1869. Former Goldman Sachs employees have held important positions in governments across the world such as United States Secretary of the Treasury, President of the European Central Bank, Governor of the Bank of Canada and Bank of England, the World Bank, and other large financial institutions. Two employees of Goldman Sachs was able to convince the bank to take a short position during the subprime crisis, profiting 4 billion by the collapse of the housing market. In September of 2008 Goldman Sachs agreed to be a traditional bank holding company which made it eligible to receive funds from 10 billion from the U.S. Treasury as an investment under the Troubled Asset Relief Program or TARP. In 2009 the investment was repaid to the U.S. Treasury at 23% interest.  Investment banking accounts for approximately 21% of current revenue, Goldman Sachs is one of the largest merger and acquisition firms, known for avoiding hostile takeovers. The largest sector of Goldman Sachs is Institutional Client Services which account for 37% of revenue. The Blackstone Group is a multinational private equity firm,  the largest alternative asset management firm, and provides financial services. Alternative assets include tangible assets such as wine, art, and coins. Blackstone was founded by two former employees of Lehman Brothers in 1985. In 2007 BX went public with an IPO value of 4 billion. Blackstone has four business units; private equity with over 100 billion assets under management, real estate which is the largest private equity firm in the world with 115 billion assets under management, Hedge fund Solutions, and  Credit where it leverages alternative asset management.

Goldman Sachs trades under the ticker GS and Blackstone under BX. Goldman Sachs has an average monthly return of 1.29% which is 15.5% annual compared to Blackstone's 1.94% and 23.3%  respectively. The standard deviation of the of Blackstone 0.0655 is slightly higher than Goldman Sachs at 0.0623. Blackstone appears as the superior investment based on these two factors. To estimate beta of the two stocks we will use SPY, an exchange traded index fund that mimics the S&P 500. As expected based on standard deviation Blackstone has a slightly higher beta at 1.43 compared to Goldman Sachs 1.30. When constructing a portfolio you can mix GS and BX to achieve a beta of 1.5, riskier than the market. In order to achieve this portfolio you would need to short Blackstone 121% of your investment in capital in order to allocate 221% in Goldman Sachs. The theory works but due to having to have capital to cover margin it is not feasible due to  accomplish. This portfolio would provide a return of 0.5% a month, 6% annually, less than SPY, GS, and BX. To construct a portfolio to get a return of 0.9% monthly, you will need to short 61% of your investment in Blackstone and use the proceeds to allocate 161% of your portfolio in Goldman Sachs with a beta of 1.4.

When using the CAPM model to build a portfolio the model assumes a one period world where investors only plan one period ahead. Using this model we can calculate the abnormal returns of two money managers by calculating beta by rolling regression. The alpha is calculated by taking the realized return minus the required return. The average alpha for Goldman Sachs is -.0128 meaning its return is less than the required for the beta or risk. The average alpha for Blackstone .0057 indicating abnormal returns above required. The Sharpe ratio which also indicates excess return for risk taken shows Blackstone as a better investment than Goldman Sachs as the ratios are .296 and .207 respectively. Treynor's measure calculates excess return using beta instead of standard deviation but comes to the same conclusion of .099 for GS and .0169 for BX. The information ratio is used by dividing the average alpha by the standard deviation of alpha. The information ratio also indicates Blackstone with a ratio of .175 and Goldman Sachs ratio of -.317. Based off of the above analysis I recommend Blackstone Group over Goldman Sachs as they offer a greater excess return in all ratios analyzed.