Investment and Portfolio Management

Running head: INVESTMENT AND PORTFOLIO MANAGEMENT
Investment and Portfolio Management
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1INVESTMENT AND PORTFOLIO MANAGEMENT
Table of Contents
Introduction................................................................................................................................2
Discussion..................................................................................................................................2
Annual Mean Return, Standard Deviation and Correlation...................................................2
Investment Opportunity Set...................................................................................................3
Optimal Risky Portfolio.........................................................................................................5
Risk and Return of Optimal Portfolio....................................................................................6
Minimum Variance Portfolio.................................................................................................7
Risk and Return of Minimum Variance Portfolio..................................................................7
Diversification........................................................................................................................8
Conclusion..................................................................................................................................9
Reference..................................................................................................................................11

2INVESTMENT AND PORTFOLIO MANAGEMENT
Introduction
The stock price analysis for the Exon Mobil and Apple Stock Incorporation was taken
into consideration for the purpose of Investment Analysis and Portfolio Construction. Five-
years of monthly data was taken into consideration for the purpose of the analysis of the
stocks. Risk and return are some of the important characteristics of investment and the same
has been taken into consideration while deciding the optimum weights of each of the security
in the portfolio (Calvo, Ivorra and Liern 2016).
Discussion
Annual Mean Return, Standard Deviation and Correlation
The annual mean for both the stocks were evaluated by taking the monthly return
generated by each of the stocks and annualizing the same to get the annualised return of the
same. The standard deviation of each of the stock was derived by taking a square root of the
annual standard deviation of both the stocks (Hoesli and MacGregor 2014). The annual mean
return for the Apple Incorporation was around 22.47% and the standard deviation for the
stock was around 23.24%. The annual mean return for the Exxon Mobil Company was
around 2.53% and the standard deviation for the stock was around 14.28%. The correlation of
the stock were around 0.04476 (Finance.yahoo.com 2019).
CALCULATING THE RETURN
Apple Inc. Exxon Mobil Corp
Month Price Return Price Return
Monthly Mean 1.87% 0.21%
Monthly Variance 0.45% 0.17%
Monthly Standard Dev. 6.71% 4.12%
Annual Mean 22.47% 2.53%
Annual Variance 5.40% 2.04%
Annual Standard Dev. 23.24% 14.28%

3INVESTMENT AND PORTFOLIO MANAGEMENT
Investment Opportunity Set
The investment proportions for the two stocks were prepared for the two stocks from
0% to 100% using interval of 5%. The investment opportunity set for the stocks could be well
prepared with the help of the stock giving the maximum return in contrast to the risk taken by
the stock. The investment opportunity curve was made where the optimum investment
opportunity in the stock could be found with the help of risk/return formula. While preparing
the investment opportunity set the Apple stock was denoted as “S” and Exon Mobil was
denoted as “B” (Chandra 2017).
E(Rs) E(Rʙ) σs σʙ ρsʙ Rƒ
22.47% 2.53% 23.24% 14.28% 4.48% 2.44%
Ws Wʙ
= 1-Ws
Expected return E(Rp)
=Ws*E(Rs)+Wʙ*E(Rʙ)
Variance
(σ^p)
Standard
Deviation
(σp)
Risk/Return
0% 100% 2.53% 0.0204 14.28% 0.17716
5% 95% 3.53% 0.0186 13.62% 0.25894
10% 90% 4.52% 0.0171 13.07% 0.34614
15% 85% 5.52% 0.0160 12.64% 0.43671
20% 80% 6.52% 0.0153 12.35% 0.52775
25% 75% 7.52% 0.0149 12.20% 0.61575
26% 74% 7.81% 0.0149 12.19% 0.64049
30% 70% 8.51% 0.0149 12.21% 0.69715
35% 65% 9.51% 0.0153 12.37% 0.76898
40% 60% 10.51% 0.0160 12.67% 0.82940
45% 55% 11.50% 0.0172 13.10% 0.87785
50% 50% 12.50% 0.0187 13.66% 0.91491
55% 45% 13.50% 0.0205 14.33% 0.94190
60% 40% 14.49% 0.0228 15.09% 0.96050
65% 35% 15.49% 0.0254 15.93% 0.97238
70% 30% 16.49% 0.0284 16.84% 0.97909
75% 25% 17.49% 0.0317 17.81% 0.98191
80% 20% 18.48% 0.0354 18.82% 0.98189
85% 15% 19.48% 0.0395 19.88% 0.97982
90% 10% 20.48% 0.0440 20.97% 0.97632
95% 5% 21.47% 0.0488 22.09% 0.97185
100% 0% 22.47% 0.0540 23.24% 0.96675
105.0% -5.0% 23.47% 0.0596 24.41% 0.96126
106.5% -6.5% 23.76% 0.0613 24.77%