This website uses cookies to ensure you have the best experience.

# Portfolio Analysis

1768 words - 8 pages

Portfolio Analysis

A portfolio is a combination of securities. Portfolio analysis provides a framework by which the investors can identify optimal portfolios from a universe of infinite portfolios. Investors need to estimate the expected return and variance of each security under consideration for inclusion in the portfolio along with all the covariances between securities. With these measures the investors proceed to calculate the expected return and risk of alternative portfolios to evaluate their desirability and derive a set of efficient portfolios.

Notations
wi = percentage of investor’s funds invested in security i
wj = percentage of investor’s funds invested in ...view middle of the document...

n-Security Case
Expected return and variance of a portfolio consisting of n securities are given by
[pic] = [pic]
(2p =[pic]
for i ( j
where (ij equals variance when i = j and covariance when i ( j.
In matrix notation
[pic] = [pic][pic]

(2p = [pic] [pic][pic]

where diagonal elements are variances and off-diagonal elements are covariances. There are n variances and n(n - 1)/2 unique covariances. Total number of inputs needed to calculate risk and return for an n-security portfolio is n(n + 3)/2 which comprises n expected returns, n variances, and n(n - 1)/2 unique covariances. In a portfolio of a large number of securities, portfolio risk is dominated by covariance terms. That is, a security’s variance contributes a source of risk that can be diversified away by forming a large enough portfolio.
The risk of the portfolio can be thought of as a weighted average of the contribution of total risk of the individual securities to the portfolio risk. The weights applied to each security are wi’s. Thus the contribution of an individual security to portfolio risk depends upon a security’s own variance and its covariance with other securities in the portfolio. Using variance as a measure of risk, we can rewrite the expression for portfolio variance as follows:
(2p = [pic][Total risk of security i in the portfolio]
= [pic]
i ( j
The two terms in the square brackets represent total risk of security i in the portfolio. In a well-diversified portfolio, the first term, [pic], will be small and relatively unimportant. The next term is a weighted sum of the security’s covariance with all other securities in the portfolio. In a diversified portfolio, this term will not be small, since the sum over j = 1 to n (where j ( i) will be almost 1. In a well-diversified portfolio, the major risk a security adds to the portfolio is the covariance that the security has with the rest of the portfolio.

Markowitz Diversification
The portfolio selection technique developed by Markowitz is known as Markowitz diversification. Markowitz diversification involves combining securities with less than perfect positive correlation in order to reduce portfolio risk without sacrificing any of the portfolio’s return. It addressees the impact of choosing portfolio weights optimally upon the diversification risk. It takes advantage of the fact that risk can be reduced further by the management of portfolio weights. It improves upon naive or simple diversification which allocates equal amounts of wealth to each security in the portfolio. In general, the lower the correlations (or equivalently, covariances) between the securities in the portfolio, the less risky the portfolio will be. This will be true regardless of how risky the securities in the portfolio are when considered in isolation.
Impact of Correlation on Portfolio Variance
Let us examine...

## Other Papers Like Portfolio Analysis

### Portfolio Risk Essay

703 words - 3 pages . Calculated portfolio risk for each possible combination of the two stocks. 5. Changed the SD and correlation coefficient to measure the impact of each on the portfolio risk. Analysis Changes in Standard Deviation of Stock 2 [pic] Figure 1. Originally, stock 2 is relatively less risky than stock 1( SD2=38.06 vs SD1=57.09 ) and hence every

### Portfolio Managment Essay

2236 words - 9 pages level for a portfolio, the SIM will employ a beta analysis to evaluate risk for a given portfolio. (Dacey, lecture, 2013). The Sharpe Model employs the same method as the Markowitz Model for generating the mean rates of return. Measuring risk is how the models differ. The beta, used in the SIM, is a measure of the correlation between that security and the market as a whole; generally we use the S&P 500 as the market in the SIM. A beta of

### Modern Portfolio

1957 words - 8 pages Elton, Gruber, Brown and Goetzmann Modern Portfolio Theory and Investment Analysis, 6th Edition Solutions to Text Problems: Chapter 8 Problem 1 Given the correlation coefficient of the returns on a pair of securities i and j, the securities’ covariance can be expressed as the securities’ correlation coefficient times the product of their standard deviations: σ ij = ρ ijσ iσ j But if we assume that all pairs of securities have the same constant

### Job Portfolio

2264 words - 10 pages Signature Assignment Job Portfolio for food server position at Best Western Hotel by Ina D. HRM Abstract The presented job portfolio is for a food server position at the restaurant of Best Western San Diego. The portfolio

### Portfolio Management

4801 words - 20 pages challenges might the company face that could significantly hamper its growth or impede its cash flow? Would investing in competitors produce better results? After a thorough analysis of the Coca-Cola Company’s strengths, weaknesses, opportunities, threats, and its financial performance and prospects for future prosperity, it is evident that a portfolio manager would be wise in investing in both the company’s equity and debt in the medium to long

### Course Portfolio

2829 words - 12 pages PIEDMONT HOUSING ALLIANCE | COURSE PORTFOLIO PROJECT PT.1 | GB519 DECISION MAKING AND MEASUREMENT | TRAVIS N.T. DORSO 2/14/2012 | Abstract In the interest of the current economy, it would be of curiosity to look into the depths of companies that are currently being funded by the government and where these funds are being used. As the economy recesses more than progresses, consumers are finally becoming more aware of how taxes

### Modern Portfolio Theory

5085 words - 21 pages 9.35% E(RHome Depot) = 1.47% -4.82% -8.57% 0.18 -14.50% 2.28% 2.62% 0.18 -4.68% -0.89% 9.13% 0.18 -3.37% 2.20% 0.18 -1.55% 0.40% E(RCoca-Cola) = - 1.81% Covariance of Returns • A measure of the degree to which two variables “move together” relative to their individual mean values over time. • In portfolio analysis, we are usually concerned with the covariance of rates of return rather than the prices or some other variable. Covariance

### Modern Portfolio Theroy

5524 words - 23 pages Modern portfolio theory From Wikipedia, the free encyclopedia "Portfolio analysis" redirects here. For theorems about the mean-variance efficient frontier, see Mutual fund separation theorem. For non-mean-variance portfolio analysis, see Marginal conditional stochastic dominance. Modern portfolio theory (MPT) is a theory of finance which attempts to maximize portfolio expected return for a given amount of portfolio risk, or equivalently

### Alex Sharpe's Portfolio

815 words - 4 pages FINA 5210: Investment Analysis (Prof. Abhiroop Mukherjee) Alex Sharpe’s Portfolio Discussion Guidelines 1. Download the raw data file from the LMES website under folder Cases Alex Sharpe’s Portfolio. Estimate and compare the average returns and variability of Reynolds and Hasbro. Which stock appears to be the riskiest by itself? Computing the average returns and standard deviations of Reynolds and Hasbro gives us the results shown

### Active Portfolio Management Strategy

3390 words - 14 pages major active bond portfolio management strategies: 1. Interest rate anticipation 2. Valuation analysis 3. Credit analysis 4. Yield spread analysis 5. bond swaps In each strategy, the manager hops to outperform the buy-and-hold policy by using acumen, skill, etc. Interest Rate Anticipation This is the riskiest strategy because the investor must act on uncertain forecasts of future interest rates. The strategy is

1143 words - 5 pages Running Head: 76587456 BUSINESS WRITING PORTFOLIOS Business Writing Portfolio Name: Institution: Course: Date: Introduction The work of a Public Relations Manager is to keep employees updated on the relevant information pertaining to the company. He/ she have to inform the relevant stakeholders about changes in corporate policy which is likely to cause impact on operation, revenue and the general reputation of the company

## Related Essays

### Portfolio Analysis Exo

879 words - 4 pages Portfolio analysis The total amount of capital invested in the portfolio is 100 000 000 CHF. We have invested the capital in several ways like: treasury, stocks and bonds. Treasury We have invested 10% of our total capital in our portfolio in different countries as follows: The amount of capital invested per country is 2 500 000 CHF. The most attractive investment in in Brazil has an interest rate per year of 9, 5

### Portfolio Analysis: The Market Position

1845 words - 8 pages Portfolio Analysis: The Market Position Juanita Williams American Intercontinental University August 30, 2015 Dr. Christopher Miller Portfolio Analysis: The Market Position The decision making process among hospitals are very complex, therefore, it has become more prevalent to use a portfolio analysis in there strategic planning process. The portfolio analysis will help any organization

### Property Portfolio Analysis

1078 words - 5 pages COMPUTER ASSIGNMENTAUTUMN SESSION 2012SCHOOL OF COMPUTING, ENGINEERING & MATHEMATICS | | | Student Name and ID number | Group Member 1 | Matthew Yee, 17048604. Tuesday 12-1pm | Group Member 2 | Johnathan Morey, 17238696. Wednesday 11am-12pm | Group Member 3 | Linda Yi, 17032764. Tuesday 12-1pm | Group Member 4 | Christopher Shepherd, 16673537. Tuesday 9-10am | Unit Name: Statistics for Business Unit Number: 200032

### Analysis Of The Components Of Project Portfolio Management And Impact On Project Managers

834 words - 4 pages Analysis of the components of project portfolio management and impact on project managers. Introduction Organizations with mature portfolio management practices have higher rates of resilience to overcome business challenges (Rise above the competition with portfolio management, no date). Project portfolio management (PPM) is a centralized management of practices, processes, methodologies and measuring techniques used for strategic