Portfolio Optimization for Jason

This assignment focuses on portfolio optimization for an investor named Jason. It presents two potential investment choices, each with specific details about underlying assets (BHP, FMG, CBA, MLB) and their performance under different economic scenarios. The task involves analyzing the risk-return profiles of both portfolios, comparing them to determine the most suitable option for Jason, and calculating the expected return and standard deviation of his chosen portfolio based on various economic conditions.

Running head: FUNDAMENTAL OF FINANCE
Fundamental of Finance
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
Question 4:.................................................................................................................................2
a. Using the excel to calculate monthly expected return and standard deviation for all four
shares and portfolio:...................................................................................................................2
b. Outlining the main business of four companies and based on information detecting highest
correlation coefficient of two stocks with calculation:..............................................................2
c. Depicting the choice better in risk-return profile, while justifying the choice by providing
knowledge about diversification:...............................................................................................5
d. Calculating the expected return and standard deviation of Janson’s portfolio:.....................6
Reference and Bibliography:......................................................................................................7

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Question 4:
a. Using the excel to calculate monthly expected return and standard deviation for all
four shares and portfolio:
Particulars BHP FMG CBA MLB Portfolio
Expected return 0.37% 1.32% 1.54% 2.37% 1.40%
Standard deviation 7.54% 13.02% 5.22% 9.82% 5.44%
From the overall evaluation of risk-return profile Melbourne IT company is providing
the highest return to investors, which could directly increase their profits. In addition,
Commonwealth Bank of Australia is identified to be the most viable stock, as risk is
relatively lower in comparison with other stocks. Commonwealth Bank of Australia has the
expected return of 1.54%, while standard deviation is at the level of 5.22%. Moreover, the
portfolio return is relatively higher in comparison to majority of the stocks, while risk is
relatively the lowest. Hence, in comparison to other stocks both Commonwealth Bank of
Australia and Melbourne IT has performed substantially well¸ which can be utilised by
investors to form an adequate portfolio. Th Jason’s portfolio returns and risk are adequately
acknowledged in the above table, where expected return is 1.40%, while risk is at the level of
5.44%.
b. Outlining the main business of four companies and based on information detecting
highest correlation coefficient of two stocks with calculation:
BHP Billiton Limited (BHP):
BHP Billiton is known for its multinational mining, which is conducted all around the
world. The company also specialises in the field of metals and petroleum products, which

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generates one third of its revenue. Moreover, BHP Billiton is one the largest mining company
in the world from the survey conducted in 2015 with an inclusion of being the fourth-largest
company in Australia (Asx.com.au 2018).
Fortescue Metal (FMG):
Fortescue Metal is an Australian Iron ore company, whose operations are conducted
allow around the world. Fortescue Metal is the fourth largest Iron ore producer in the world,
as it holds the largest iron mining region in Australia (Asx.com.au 2018). The major
competitor of Fortescue is BHP Billiton and Rio Tinto, as come the same industry. The
company is involved in mining projects and infrastructure building, which has allowed them
to accumulate adequate revenue.
Commonwealth Bank of Australia (CBA):
The Commonwealth Bank of Australia is a multinational bank, whose operation are
conducted in New Zealand, Fiji, Asia, USA, and UK. The company falls under banking and
financial service industry, where its main operation is to accept deposits, provide loans, and
financial service to customers (Asx.com.au 2018). The company provides retail banking
service, premium business service, wealth management, and executive services.
Melbourne IT (MLB):
Melbourne IT is supposed to be an Australian based internet company, whose
operations are confined within Australia. The company operates in technological field, where
it provide connection to 700,000 Australian business and generate a revenue of A$90 million.
The company provides online solution to small and medium business, which helps in
smoothing their daily operations (Asx.com.au 2018). Online business solution is provided by
the company, which helps small and medium companies to increase their online presence.

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After evaluating information of all the four companies only BHP Billiton and
Fortescue Metal is identified to have common operations. In addition, both the companies
operate in same industry and are competitors. This increases the overall correlation between
both the companies, which is later supported by excel calculation. Companies having high
correlation provide similar return and risk to the investors, which increase volatility of the
portfolio. Yin and Li (2014) mentioned that investor use inverse correlation in stock to
formulate their portfolio, as its reduces risk from capital volatile market.
Correlation BHP returns FMG returns CBA returns MLB returns
BHP returns 1 0.670411 0.113041 -0.001712
FMG returns 0.670411 1 -0.003032 -0.069973
CBA returns 0.113041 -0.003032 1 0.006995
MLB returns -0.001712 -0.069973 0.006995 1
From the evaluation of above correlation table, BHP Billiton and Fortescue Metal has
the higher correlation coefficient value of 0.670411. This indicates that share value of both
companies is interrelated, where increment in value of one share could increase value of
another share. This high correlation is present in both the companies, as they operate in same
industry. This correlation is taken from excel formula by evaluating returns of both the
companies, which directly supports the selection considered by assessing company
information. The correlation identified in above information among BHP Billiton and
Fortescue Metal is supported with the excel calculation depicted in the table. This indicates
that both the companies have highest correlation, which portrays similar return to investors.

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c. Depicting the choice better in risk-return profile, while justifying the choice by
providing knowledge about diversification:
Choice 1
Particulars BHP FMG CBA MLB
Weights 10% 30% 20% 40%
Expected return 1.69%
Standard deviation 5.9%
Choice 2
Particulars BHP FMG CBA MLB
Weights 40% 20% 30% 10%
Expected return 1.11%
Standard deviation 5.5%
From the evaluation of above table adequate choice could be identified, which might
help Jason in improving his returns, while reducing overall risk. The diversification method
can be used by investors in reducing total risk from investment, while maintaining adequate
level of returns. The portfolio weights are mainly known to be one of the best measure used
by investors in reducing risk and generate higher return from investment. Moreover,
diversification method is an essential measure, where high risk portfolio is attuned with low
risk portfolio to raise return from the investment (Gitman et al. 2015). Hence, after the
evaluation Choice 1 is recognised to have better risk-return profile in comparison with
Choice 2. The evaluation states that risk level of Choice 2 is relatively lower, while return is
near the value of Choice 1.

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d. Calculating the expected return and standard deviation of Janson’s portfolio:
Economic condition Probability BHP FMG CBA MLB
Resilient 20% 16% 10% 21% 17%
Stagnation 50% 6% 7% 4% 3%
Contraction 30% -8% -2% -10% -16%
Economic condition Estimated return Deviation
Resilient 16.00% 0.34%
Stagnation 5.00% 0.02%
Contraction -9.00% 0.43%
Janson's portfolio Value
Expected return 3.00%
Variance 0.79%
Standard deviation 8.89%

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Reference and Bibliography:
Asx.com.au. (2018). Home - Australian Securities Exchange - ASX. [online] Available at:
http://www.asx.com.au/ [Accessed 19 Jan. 2018].
Au.finance.yahoo.com. (2018). Business, Investments, Stocks & Quotes - Yahoo7 Finance.
[online] Available at: https://au.finance.yahoo.com/ [Accessed 19 Jan. 2018].
Gitman, L.J., Joehnk, M.D., Smart, S. and Juchau, R.H., 2015. Fundamentals of investing.
Pearson Higher Education AU.
Yin, W. and Li, J., 2014. Macroeconomic fundamentals and the exchange rate dynamics: A
no-arbitrage macro-finance approach. Journal of International Money and Finance, 41,
pp.46-64.