Assignment On Portfolio Construction | Financial Management
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Added on 2020-02-17
Assignment On Portfolio Construction | Financial Management
Added on 2020-02-17
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FINANCIAL RISKMANAGEMENT
Table of ContentsINTRODUCTION.......................................................................................................................................................................................11. Estimating monthly, annual and expected return from each share......................................................................................................1Share price at the beginning of the year...................................................................................................................................................12. Estimating the standard deviation of the annual returns......................................................................................................................33. Produce a correlation matrix between monthly returns on each pair of shares...................................................................................34. Efficient frontier chart and explaining the relationship between risk and return and diversification..................................................45. Practical limitation of the approach to portfolio management & the model........................................................................................6CONCLUSION............................................................................................................................................................................................7REFERENCES............................................................................................................................................................................................8APPENDIX..................................................................................................................................................................................................9Appendix: 1. Calculation of monthly return of stock..............................................................................................................................9Appendix 2: Monthly return on FTSE 100 Index..................................................................................................................................11
INTRODUCTION In the turbulent and volatile market, it is too critical for the establishments to use risk management strategies for mitigatingtheir internal & external risks. Financial risk management belongs to the area of finance aspects wherein companies make decisionsfor ensuring enough availability of funds, easy access to required capital and its proper utilisation with managed risk. Portfolioconstruction is a part of financial management which combines various set of securities and blend them together to obtain maximumyield at minimum risk. The current research is based on an efficient portfolio construction and management along with spreadsheetmodelling. 1. Estimating monthly, annual and expected return from each share Monthly return: Per month return on a security that is expected to gain by the investor with the price differences is calledmonthly return (Roman, Arbex Valle and Mitra, 2017). It is calculated here as under:Current month’s share price - last month’s share price/Last month’s share price*100See Appendix 1 & 2. Annualized returnShare price at the end of the year – Share price at the beginning of the year *100Share price at the beginning of the year Year BarclaysGlaxoSainsburyMorrisonBSkyBRioTintoW.HillShellAdmiralFTSE 1002012160.13%8.20%-2.85%2.46%13.08%125.10%-21.31%9.26%32.26%3.81%2013-3.29%1.93%16.18%-7.44%37.96%44.77%-14.61%26.42%33.72%7.52%2014-40.07%30.39%-20.60%22.40%-2.98%-26.99%11.74%13.04%-48.14%0.85%201523.45%-5.32%19.66%-8.04%11.16%-7.71%54.92%-5.78%23.27%-7.51%2016-11.63%11.59%23.68%5.58%0.55%-8.76%-0.81%-10.94%2.21%11.51%Page 1 of 18
Averagemarketreturn 25.72%9.36%7.21%2.99%11.95%25.28%5.99%6.40%8.66%3.24%Expected return: It has been computed using CAPM (Capital assets pricing model) that presents relationship between riskand return for the particular assets i.e. security and helps to design a well-diversified portfolio (Scherer, 2002). CAPM: Risk free rate + beta (Market rate – risk free rate)BarclaysGlaxoSainsburyMorrisonBSkyBRio TintoW.HillShellAdmiralRisk free rate of return 4%4%4%4%4%4%4%4%4%Market return 25.72%9.36%7.21%2.99%11.95%25.28%5.99%6.40%8.66%Beta (Slope)-0.8434490.44940.4863090.23405650.29720691.6223620-3.35880840.284150.2192610Expected return-14.32%6.41%5.56%3.76%6.36%38.53%-2.67%4.68%5.02%BarclaysGlaxoSainsburyMorrisonBSkyBRioTintoW.HillShellAdmiral-20.00%-10.00%0.00%10.00%20.00%30.00%40.00%50.00%Expected return of stock Expected return Page 2 of 18
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