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

Portfolio Risk Essay

703 words - 3 pages

Applied Microeconomics Coursework 1

Aim

To derive and describe the effect of stock 2 and that of correlation between stock 1 and 2 prices on the overall portfolio risk.

Introduction

Standard deviation (SD) is used to measure risk by determining the volatility of a stock. It is a statistical term that measures the amount of variability around an average mean price.

Correlation measures the relationship between two variables. Coefficient of Correlation can range between -1 and +1 depending on the degree and direction of the relationship. Positive correlation denotes that both stocks will follow similar movement whereas negative correlation denotes the opposite relationship.
...view middle of the document...

1). Firstly, I found that the lower the SD the quicker the risk fell.

As you can see from Figure 1, the opposite occurs when higher SD values are used. Every additional unit of Stock 2 would actually increase the portfolio risk result in an upward sloping curve.

Initially with an increase in proportion of stock 2 the SD of the portfolio was decreasing. However after a certain portfolio, the proportion of Stock 2 became so high that each additional unit of Stock 2 was adding to the portfolio risk, as the effect of diversification with stock 1 was wearing out.

Hence with a SD of 80 of stock 2 an ideal portfolio would be 9 units of Stock 1 and 81 units of Stock 2. This portfolio will have the lowest risk.

|QA |QB |Portfolio Risk AB |
|10 |80 |10924652.53 |
|9 |81 |10919149.82 |
|8 |82 |10919319.38 |

Table 1.

Changes in Coefficient of Correlation

Portfolio Risk = a2(sd1)2 + b2(sd2)2 + 2ab(sd1)(sd2)(r)

Where ‘a’ and ‘b’ represents the number of Stock 1 and 2 shares respectively...

Other Papers Like Portfolio Risk

Assignment 1 Dequin

1225 words - 5 pages Stock E(R)= Risk-free rate + Beta of the Stock (Return on Market- Risk-free rate) Return on the stock when the Beta is 1.5 E(R) = 6% + 1.5(10%-6%) = 12% Return on the stock when the Beta is 2 E(R) = 6% + 2(10%-6%) = 14% A concept of portfolio theory says greater risk is associated with higher returns expected from a stock or a portfolio. To make a portfolio consistent according to portfolio theory, investors must evaluate the correlation

Partner Healthcare Essay

1110 words - 5 pages determine the benefit of adding new assets to the portfolio, we need to analyze if the new portfolio’s expected return will increase for a given amount of risk, or equivalently the overall risk will decrease for a given level of expected return. The Sharpe ratio, which measures the excess return (or risk premium) per unit of risk, is a good parameter to rank the performance of different portfolios. We have 3 alternatives here: 1) adding REITs only; 2

Finding Your 401k Beta

650 words - 3 pages Project 4: Finding Your 401(k) Beta The following report will evaluate and compare the systematic risk of the stocks within a 401(k) investment portfolio. The time period for which the stocks in this investment portfolio have been analyzed is January 1, 2004 through December 31, 2014. Each stock has had a beta test and corresponding regression analysis performed. A portfolio-wide beta test has also been completed to make further detailed

Financial

2597 words - 11 pages movements have low correlation with each other. We can limit the volatility of our portfolio by spreading out our risk among different types of investments. An efficient is either a portfolio that offers a highest expected return for a given level of risk, or one with the lowest level of risk for a given return. The line that connects all these efficient portfolios is the efficient frontier. Our goal is to build an efficient portfolio. I used

Report About Constructing Portfolio of Stocks

3438 words - 14 pages INTRODUCTION Getting the maximum return possible is the main focus in any market to every investor. But along with return, there comes risk. And in managing risk, every investor tries to keep it at minimum while trying to adhere to the targeted return. In doing so, investors have found that diversification of investment through portfolio investment can meet the investment goals in a better way than investing in a single security. Therefore, to

Justification for an Internal Control System

657 words - 3 pages for an internal control system when controls are in place with insurance and portfolio approaches. Insurance Approach A company will purchase insurance to protect their assets. The owner of a company will purchase liability insurance to protect his income, home, and other personal items of worth. The company will do a risk analysis to determine the most significant risks of the company. Then the company will purchase insurance to mitigate these

Chapter 7: Optimal Risky Portfolios

3853 words - 16 pages CHAPTER 7: OPTIMAL RISKY PORTFOLIOS CHAPTER 7: OPTIMAL RISKY PORTFOLIOS PROBLEM SETS 1. 2. (a) and (e). (a) and (c). After real estate is added to the portfolio, there are four asset classes in the portfolio: stocks, bonds, cash and real estate. Portfolio variance now includes a variance term for real estate returns and a covariance term for real estate returns with returns for each of the other three asset classes. Therefore, portfolio risk

Equity Markets

885 words - 4 pages can also be useful when it come to diversifying a portfolio and reducing risk. Another thing that should be considered is the number of securities within the portfolio because this has a large impact on diversifiable risk. 1)Risk measures -Why is it important to consider different risk measures? Although standard deviation may be one of the most common and widely used tool to measure risk it is very important that one considers

Management Accounting

5002 words - 21 pages TOPIC THREE PORTFOLIO THEORY AND CAPITAL ASSET PRICING MODEL (CAPM) Reading : BKM: Chapters 7&9 Pilbeam: Chapters 7&8 OUTLINE  Section I:  The concept of portfolio and diversification  Calculate portfolio expected return  Measuring portfolio total risk: variance and standard deviation  Market portfolio  Measuring systematic risk: Beta Section II:  Markowitz Portfolio Theory  Efficient portfolio and Efficient Frontier  Capital

Finance 100

1172 words - 5 pages that influences a large number of assets called market risk. Where as unsystematic risk is a risk that influences a single company of a small group of companies, also called unique risk. Unsystematic risk is eliminated by diversification, so a portfolio with man assets has almost no unsystematic risk. Unsystematic risk is also called diversifiable risk. Systematic risk is called non diversifiable risk. Diversification eliminates unsystematic

Analysis of the Components of Project Portfolio Management and Impact on Project Managers

834 words - 4 pages pipeline flow, project prioritization, change management, resource management, portfolio evaluation and risk management. The objective is to ensure that the strategic business objectives such as revenue growth, cost reduction, regulatory mandate, business continuity, among others, are achieved. Key Components of project portfolio management Strategic pipeline flow. This component includes the processes of screening of project proposals and

Related Essays

Portfolio Analysis

1768 words - 8 pages ] 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

Joy Marketing Plan Essay

615 words - 3 pages portfolio. You build the portfolio by buying additional stocks, bonds, mutual funds, or other investments. Your goal is to increase the portfolio's value by selecting investments that you believe will go up in price. According to modern portfolio theory, you can reduce your investment risk by creating a diversified portfolio that includes enough different types, or classes, of securities so that at least some of them may produce strong returns in any

Value Essay

4199 words - 17 pages stocks, bonds, and cash alternatives (risk-free-money market investments), which of the properties of real estate returns affect portfolio risk? Explain. a. Standard Deviation b. Expected Return c. Correlation with the returns of other assets (a) and (c). The portfolio risk (standard deviation) calculation now includes the variance of real estate returns and correlation between real estate and stocks the correlation between

Gii Dcf Valuation Essay

550 words - 3 pages LEARNING OUTCOMES LEARNING OUTCOMES Program: Master in Wealth Management Professor: Georges Hübner Title of course: Personal Portfolio Management  ECTS Credits (teaching days): 3 Learning Objectives: * Consider the client from the point of view of his/her preferences for risk and return * Determine the risk and return of various asset classes and explain where the risk premium comes from * Understand and master the