Capital Markets and Investment TABLE OF CONTENTS

Capital Markets and Investment

TABLE OF CONTENTS
1. INTRODUCTION.......................................................................................................................1
2. ASSETS SELECTION................................................................................................................1
2.1 VO25......................................................................................................................................2
2.2 TR28.......................................................................................................................................2
2.3 British Petroleum...................................................................................................................2
2.4 Admiral Group Plc.................................................................................................................3
2.5 Royal Dutch Shell Plc...........................................................................................................4
3. INVESTMENT THEORIES.......................................................................................................4
3.1 Capital Assets Pricing Model.................................................................................................4
3.2 Modern Portfolio Theory (MPT)...........................................................................................5
3.3 Investment style and assets allocation...................................................................................6
4. EVALUATION...........................................................................................................................8
5. CONCLUSION............................................................................................................................9
REFERENCES..............................................................................................................................10
APPENDICES...............................................................................................................................12
7.1 Historical Returns of the equities and bonds.......................................................................12
7.2 Average return of FTSE index during the period of five weeks:.........................................13
7.3 Coupon returns for bond......................................................................................................14
7.4 Capital assets pricing model................................................................................................15
7.5 Portfolio expected return......................................................................................................16

Figure 1: British Petroleum.............................................................................................................3
Figure 2: Admiral Group Plc...........................................................................................................3

1. INTRODUCTION
In volatile market, it is too tough to create a balanced portfolio as
market changes frequently. In order to make rationalized investment,
investors require examining risk-return relationship of various securities and
use various theories and strategies for creating the optimum portfolio that
delivers them greater return. Current research paper investigatesvarious
theories such as Capital Assets Pricing Model (CAPM) and Efficient Market
Hypothesis (EMH) that are helpful for driving efficiency. For the purpose of
portfolio creation, five stocks listed on London Stock Exchange as
constituents of FTSE 100 Index had been selected. The aim of the portfolio is
to achieve maximum return. Total available fund of £150,000 is allocated to
stock belong to different industries following diversification strategy so as to
spread out the risk. Investment favors accepting a moderate level of risks so
as to generate better return. He is concerned mainly with the capital growth
but at the same time, safety of fund is also important. Good portfolio return,
with moderate level of risks suits moderate to aggressive risks tolerance
attitude of investor. The study emphasized on how investment theories are
relevant to such investment style. Historical prices of all the chosen 5-stocks
will be gathered from the period of 27th February 2017 to 3rd April 2018 for
determining stock return, index return and track the performance.
2. ASSETS SELECTION
As now market is highly volatile and return fluctuates continuously,
therefore, considering such up and down changes prevalent in the market, it
is decided to invest total capital in different assets rather than choosing a
particular one. All the chosen companies are London-based companies and
operate internationally. All the chosen stocks are listed on LSE as FTSE 100
constituents.The diversification strategy within assets aimed to spread out
risks with the target to avoid extreme loss and manage average return. The
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rationale behind the selection of all such assets over their competitors is that
P/E ratio of all the stocks was greater than 10%. Further, value of market
capitalization of such units was also higher. Hence, considering all such
aspects, equities have been selected by the investor. Along with this, both
VO25 and TR28 are considered as trustworthy bonds as they are issued by
UK government. Hence, all such criterias were considered for stock selection.
Further, using solver tool weights are assigned to the bonds and stocks.
The main reasons behind the selection of such equity assets in the
portfolio are their beta value. Beta value which exceeds the range of 1
considered as highly volatile or riskier. In the context of British Petroleum
and Admiral Group plc, beta value accounts for .58 & .51 respectively. This in
turn shows that such securities are not highly volatile in nature. On the basis
of this, fluctuations which take place in the market index do not have
significant impact on the company’s share price. This criterion of stock
selection is considered by taking into account the conservative nature of
investor. In addition to this, for the attainment of suitable margin within the
period, security with high beta is also considered.
Bonds selected for the portfolio Type of
the
security
Ticker
Vodafone Group Bond VO25
Gilts bonds issued by UK government Bond TR28
Equities selected for
the portfolio
Typ
e of
the
secu
rity
Ticke
r
Industry Mark
et
capit
al
be
ta
PE
ratio
British Petroleum Equit BP Oil & gas 101.1 0.5 29.65
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