Investment Analysis and Portfolio Management

This document provides an overview of investment analysis and portfolio management. It covers topics such as calculating minimum variance portfolio, plotting efficient frontier, risk aversion utility function, optimal risky portfolio, advantages and disadvantages of index model compared with Markowitz, and detecting better selectors. The document also includes references and bibliography.

Running head: INVESTMENT ANALYSIS AND PORTFOLIO MANAGEMENT
Investment Analysis and Portfolio Management
Name of the Student:
Name of the University:
Authors Note:

INVESTMENT ANALYSIS AND PORTFOLIO MANAGEMENT
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Table of Contents
Question 2:.................................................................................................................................2
a. Calculating the Minimum variance portfolio:........................................................................2
b. Plotting the efficient frontier:.................................................................................................3
c. Calculating the risk aversion utility function:........................................................................3
d. Calculating the optimal risky portfolio:.................................................................................4
e. Indicating the slope of the capital asset line of this optimal risky portfolio:.........................4
f. Calculating the risk aversion utility function:.........................................................................4
Question 3:.................................................................................................................................5
1. Advantages and disadvantages of index model compared with Markowitz:.........................5
2. Stating the basic trade-off when departing from pure indexing in favour of an actively
managed portfolio:.....................................................................................................................5
3a. Detecting which investors were better selector:...................................................................6
3b. Detecting which investors were better selector when T-bill is 5%:.....................................6
3c. Detecting which investors was better selector when T-bill is 3%:.......................................6
References and Bibliography:....................................................................................................8

INVESTMENT ANALYSIS AND PORTFOLIO MANAGEMENT
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Question 2:
a. Calculating the Minimum variance portfolio:
BHP Billiton Limited Telstra Corporation Limited
Date Close Return Date Close Return
1/31/2018
30.2
0 1/31/2018 3.67
2/28/2018
30.5
0 0.99% 2/28/2018 3.35 -8.72%
3/31/2018
28.2
1 -7.51% 3/31/2018 3.14 -6.27%
4/30/2018
30.9
5 9.71% 4/30/2018 3.18 1.27%
5/31/2018
32.7
9 5.95% 5/31/2018 2.80 -11.95%
6/30/2018
33.9
1 3.42% 6/30/2018 2.62 -6.43%
7/31/2018
34.8
6 2.80% 7/31/2018 2.84 8.40%
8/31/2018
33.2
1 -4.73% 8/31/2018 3.10 9.15%
9/30/2018
34.6
3 4.28% 9/30/2018 3.19 2.90%
10/31/2018
32.2
1 -6.99% 10/31/2018 3.08 -3.45%
11/30/2018
30.6
9 -4.72% 11/30/2018 2.93 -4.87%
12/31/2018
34.2
3 11.53% 12/31/2018 2.85 -2.73%
Average return 1.34% -2.06%
Variance 0.39% 0.42%
Standard deviation 6.26% 6.47%
Annualised return TEL=¿ ¿
Annualised return BHP=¿ ¿

INVESTMENT ANALYSIS AND PORTFOLIO MANAGEMENT
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Weigh tTel= ( σs
2−σ s σ B ρS , B )
( σ S
2 +σ B
2 −2 σ s σB ρS ,B )
Weigh tTEL= ( ( 6.26 % ) 2− ( 6.26 % ) ( 6.47 % ) ( −0.00003319 ) )
( ( 6.26 % ) 2 + ( 6.47 % ) 2−2 × ( 6.26 % ) ( 6.47 % ) ( −0.00003319 ) ) = 0.0039
0.00811 =0.48406498
Weigh tBHP=1−Weigh tTEL=1−0.48406498=0.51593530
b. Plotting the efficient frontier:
4.00% 4.50% 5.00% 5.50% 6.00% 6.50% 7.00%
-2.50%
-2.00%
-1.50%
-1.00%
-0.50%
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
Effecient Frontier
The graph indicates the relevant information regarding the investments that can be
conducted in both BHP and Telstra for reducing the total risk of the portfolio. The graph
indicates that investor to increase their return from investment need to raise the risk level
(Chandra, 2017).
c. Calculating the risk aversion utility function:
Minimum variance portfolio Value
Telstra Corporation Limited 48.41%
BHP Billiton Limited 51.59%
Expected return 0.72%
Standard deviation 4.48%

INVESTMENT ANALYSIS AND PORTFOLIO MANAGEMENT
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A 2
Utility score -3.77%
The above calculation indicates the utility score for the minimum variance portfolio
created for investments. In addition, the calculation also indicate that the utility score in
negative, which indicates that the returns from investment cannot be higher for the investors.
Thus, there is a high probability to get loss from investment due to the rising utility score
(Damodaran, 2016).
d. Calculating the optimal risky portfolio:
( E ( r B )−rf ) × σS
2 − ( E ( rS ) −rf ) ×σ S σB ρS,B
( E ( r B )−rf ) × σS
2 + ( E ( r S )−r f ) × σB
2 − ( E (r B ) −rf + E ( rS ) −rf ) ×σ S σ B ρS,B
W T = ( 1.34%-2.5% ) ( 6.26 % )2− (−2.06 %−2.5 % ) ( 6.26 % ) ( 6.47 % ) ( 0.00003319 )
( 1.34%-2.5% ) ( 6.26 % )2 + (−2.06 %−2.5 % ) (6.26 % )2− (1.34 %−2.5 %−2.06 %−2.5 % ) ( 6.26 % ) ( 6.47 % ) (
W T =−0.000046
0.011372 =−0.0040064=−0. 40 %
Weight B =1−WeightT=1+ 0.0040064=1 .0 040064=100.40 %
e. Indicating the slope of the capital asset line of this optimal risky portfolio:
The slope of the Capital Asset Line for Optimal Risky portfolio is tangent to the
efficient frontier. This indicates that the capital asset line touches the efficient frontier on the
far, which indicates the most profitable investment option that is presented to the investors
(Marglin, 2014).

INVESTMENT ANALYSIS AND PORTFOLIO MANAGEMENT
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f. Calculating the risk aversion utility function:
Optimal risky portfolio Value
Rf 2.50%
Telstra Corporation Limited -0.40%
BHP Billiton Limited 100.40%
Expected return 18.66%
Standard deviation 6.29%
A 2
Utility score 12.37%
The utility score of optimal risky portfolio is relevantly high, which depicts about the
high returns that can be generated from an investment with the portfolio specifications and
weights.
Question 3:
1. Advantages and disadvantages of index model compared with Markowitz:
There are specific advantages of the index model, one of which indicates that it is
more easier to implement in comparison to the Markowitz. Moreover, the index model
simplifies the estimation of covariance matrix by making few key assumptions, while
Markowitz does not allow any kind of forecast security risk premiums. However, the major
limitation of index model is that it does not take more factors are Markowitz, while making
the portfolio allocation decision. Furthermore, the disadvantage of index model is the
assumptions that is been conducted, which increases the chance of errors (Briston, 2017).

INVESTMENT ANALYSIS AND PORTFOLIO MANAGEMENT
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2. Stating the basic trade-off when departing from pure indexing in favour of an
actively managed portfolio:
The additional management fees incurred towards managing the portfolio with a
possibility of superior performance is known as the basic trade-off when departing from pure-
indexing activity.
3a. Detecting which investors were better selector:
The determination of the better selector is not possible without the detection of the
abnormal returns. There is no information regarding the parameters such as risk free rate and
market return, which is used for detecting the abnormal return from an investment. Without
the detection for the abnormal returns it is hard to say which investor is the better selector.
3b. Detecting which investors were better selector when T-bill is 5%:
Particulars Value
Investors 1 return 18%
Investors 1 beta 1.4
Investors 2 return 15%
Investors 2 beta 0.99
T-Bill 5%
Market return 13.5%
Investor 1 18% - [5% + 1.4(13.5%- 5%)]
Investor 1 18% - 16.90% = 1.10%
Investor 2 15% - [5% + .99(13.5%- 5%)]
Investor 2 15% - 13.42% = 1.59%

INVESTMENT ANALYSIS AND PORTFOLIO MANAGEMENT
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Investor 2 will be selected as the better selector, as its abnormal returns are higher
than investor 1.
3c. Detecting which investors was better selector when T-bill is 3%:
Particulars Value
Investors 1 return 18%
Investors 1 beta 1.4
Investors 2 return 15%
Investors 2 beta 0.99
T-Bill 3%
Market return 15%
Investor 1 18% - [3% + 1.4(15%- 3%)]
Investor 1 18% - 19.80% = -1.80%
Investor 2 15% - [3% + .99(15%- 3%)]
Investor 2 15% - 14.88% = 0.12%
Investors 2 is better selector, as the investment selected by investor 1 is valueless.

INVESTMENT ANALYSIS AND PORTFOLIO MANAGEMENT
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References and Bibliography:
Briston, R. J. (2017). The stock exchange and investment analysis. Routledge.
Chandra, P. (2017). Investment analysis and portfolio management. McGraw-Hill Education.
Chisholm, D., Sweeny, K., Sheehan, P., Rasmussen, B., Smit, F., Cuijpers, P., & Saxena, S.
(2016). Scaling-up treatment of depression and anxiety: a global return on investment
analysis. The Lancet Psychiatry, 3(5), 415-424.
Damodaran, A. (2016). Damodaran on valuation: security analysis for investment and
corporate finance (Vol. 324). John Wiley & Sons.
DeFusco, R. A., McLeavey, D. W., Pinto, J. E., Anson, M. J., & Runkle, D. E.
(2015). Quantitative investment analysis. John Wiley & Sons.
Marglin, S. A. (2014). Public Investment Criteria (Routledge Revivals): Benefit-Cost
Analysis for Planned Economic Growth. Routledge.