Investment Analysis And Portfolio Analysis | Assignment

Added on - 30 Sep 2019

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Bus633 Investment Analysis and Portfolio Analysis
Table of ContentsIntroduction................................................................................................................................2Portfolio of Assets......................................................................................................................2Real Estate..............................................................................................................................2Gold........................................................................................................................................3Strategic actions for the reduction in portfolio risks..................................................................3Conclusion..................................................................................................................................3
Portfolio Theory and Lessons learnedIntroductionInvestments are made by individuals and organizations in order to grow their money from thereturns obtained from them. These investment options can be various types depending uponthe time frame and exposure to the market. Selecting the appropriate investment which is inaccordance with the risk return capability is important to avail the maximum out of suchinvestments.When the various investments are combined together, it forms a portfolio which is less riskythan the individual investment assets(Awoga, 2011). The aim of this report is to analyseModern Portfolio Theory and review the five asset portfolio for their risk and returncapabilities.The aim of this report is to analyse the risk return profile of a hypothetical portfolio based outof five different asset classes. These assets would include, real estate, stocks, gold, bond, andforward contracts. The process of diversification has been discussed in detail which helps toreduce the overall risk of the portfolio.This paper also applies dividend discount model and capital asset pricing model which wouldbe applied for the evaluation of stocks. This paper also discusses portfolio beta whichindicate the sensitivity of the asset classes with the changes in the market. Based on theseconcepts of asset and modern portfolio theory, the risk and return of the entire portfolio hasbeen evaluated.Modern Portfolio Theory and the related assetsThis theory is based on assembling of assets in a manner which maximises the total return ata given level of risk. Thus various kinds of financial assets are used and combined togetherfor investment. This theory was introduced by Harry Markowitz in the year 1952. Some ofthe important features of this theory are as follows:Diversification- This theory indicates that the overall portfolio risk can be reduced by holdingthe assets which are not perfectly positively related. The correlation between the asset pairplays an important role to determine the portfolio’s return variance.
Expected return and risk- This theory makes an assumption that the investors are risk averseand would try to choose that portfolio which provides less risk with the same expectedreturns. However the individual risk profile of the investor may differ which allow them toselect a portfolio with high risk and return.Capital Allocation line- Modern Portfolio theory indicates the best possible allocation of theassets which maximises the return from the entire investment. The efficient frontier indicatethe best return possible at a given rate of risk. The tangency point is the best capital allocationline which indicate the maximum profit the investor can expect out of the portfolio.Mutual Fund Theorem- The mutual fund theorem is also supportive of the modern portfoliotheory. It indicates that in the case of the risk free asset, any portfolio on the efficient frontiercan be achieved if it lies between the two mutual funds.Risk free asset- This is one of the important part of the modern portfolio theory. It is one ofthe tangency point to the efficient frontier hyperbola.Using these theories, we would allocate the resources in various assets in order to attainmaximum return from the portfolio.Portfolio of AssetsThe five assets would be allocation in the proportion as follows:Bonds- 35%Shares- 30%Forward Contracts- 15%Gold- 5%Real estate- 15%These allocation would be altered depending upon the market situations and also till thecapital allocation line is tangent to the efficient frontier of the portfolio. Such is an optimalsituation as any combination of portfolio would not be able to provide the return which ishigher than the equilibrium tangency point.The five assets which have been evaluated to be included in a portfolio are as follows:
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