Risk and Return Tradeoff Memo
The construction portfolio process concludes to be very complex. Statistical past performance, industry knowledge, future potential and relying on insights that are personal are typically what analysts rely on within the market in order to arrive at the final list. Maximizing returns while minimizing risk is the goal every investor aims for. An evaluation of individual securities as well as risk return trade off within isolation and the risk return trade off contribution of the entire portfolio. The managing and constructing of a portfolio simulation outlining the fundamentals within the construction of the portfolio in regards to the risk return trade off as ...view middle of the document...
A selection to distribute the $800,000 evenly among the four stocks would result in an expected portfolio risk of 20.45%. The expected portfolio return would be 12.74% and the Sharpe ratio would conclude to be 38.46%.
The decision was successful given the management was pushing for a risk below 22%, which was accomplished. The 22% threshold did not allow allocation of more funds in higher return stocks with average risk. Additionally, investing the entire amount in stocks was a wise decision. Otherwise, the remaining amount unused would have given a five percent return from bank deposits.
The portfolio required some investment changes given the downturn in the economy. An option was given to sell some stocks through management increasing the portfolio risk of 30% and invest government securities up to $400,000. Additionally, borrowing $400,000 extra to invest is another option yet the ceiling investment for each stock is set at $800,000. The decision was made to deter away from borrowing any funds to invest given the rate for borrowing is currently at 8.80 percent. The average return rate concludes to be 8.50 percent. With the risky market currently, the economy did not conclude to be 100% unstable. The choice was made to not invest in government securities considering the stocks would reveal a higher return. The following allocation was selected with the $800,000:
Desktop, Inc. $216,327
Levinthal Defense Systems $175,939
Transconduit, Inc. $144,000
Goldstein and Delaney Bank $221,348
The expected return from the allocation came in at 9.20% and the Sharpe Ratio came in at 25.86% which concluded to be enthusiastic to senior management. (see chart below)
Sharpe Ratio-Investment Decisions
Nobel Laureate William Sharpe concludes to be where the name came from for “The Sharpe Ratio”. The Sharpe Ratio is the measure of the excess return of a portfolio and is in relation measured to the variability total of the portfolio. The definition of The Sharpe Ratio is monthly return of the average ratio in a three months excess of the U.S. Treasury bill that is divided by monthly returns of the standard deviation. A calculation of the monthly returns over the whole sample time frame is done. The characteristic of The Sharpe Ratio will determine how well the return of an asset compensates the investor for the risk that was taken. The measurement concludes to be very helpful in a portfolio or fund can conclude to be higher returns than peers. It will only reveal to be a successful investment if the higher returns do not absorb to much additional...