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Investment Analysis And Portfolio Analysis | Assignment

   

Added on  2019-09-30

11 Pages2980 Words1588 Views
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 upon the time frame and exposure to the market. Selecting the appropriate investment which is in accordance with the risk return capability is important to avail the maximum out of such investments.When the various investments are combined together, it forms a portfolio which is less risky than the individual investment assets (Awoga, 2011). The aim of this report is to analyse Modern Portfolio Theory and review the five asset portfolio for their risk and return capabilities.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, and forward contracts. The process of diversification has been discussed in detail which helps to reduce 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 which indicate the sensitivity of the asset classes with the changes in the market. Based on these concepts of asset and modern portfolio theory, the risk and return of the entire portfolio has been evaluated.Modern Portfolio Theory and the related assetsThis theory is based on assembling of assets in a manner which maximises the total return at a given level of risk. Thus various kinds of financial assets are used and combined together for investment. This theory was introduced by Harry Markowitz in the year 1952. Some of the 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 pair plays an important role to determine the portfolio’s return variance.

Expected return and risk- This theory makes an assumption that the investors are risk averse and would try to choose that portfolio which provides less risk with the same expected returns. However the individual risk profile of the investor may differ which allow them to select a portfolio with high risk and return. Capital Allocation line- Modern Portfolio theory indicates the best possible allocation of the assets which maximises the return from the entire investment. The efficient frontier indicate the 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 portfolio theory. It indicates that in the case of the risk free asset, any portfolio on the efficient frontier can 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 of the tangency point to the efficient frontier hyperbola. Using these theories, we would allocate the resources in various assets in order to attain maximum 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 the capital allocation line is tangent to the efficient frontier of the portfolio. Such is an optimal situation as any combination of portfolio would not be able to provide the return which is higher 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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