Portfolio Management and Risk Assessment

The provided assignment is an in-depth analysis of a portfolio's performance over a specific period. It includes the valuation of various stocks, such as AstraZeneca, GlaxoSmithKline, EasyJet, RyanAir, Sky PLC, WPP PLC, 3i Group, A2D Funding PLC, BG Transco, Alpha Plus Holdings PLC, and Anglo American Capital. The analysis also compares the portfolio's return with a benchmark return and calculates its beta. Furthermore, it estimates the net return on investment, including interest from a loan taken, and provides a Trenyor ratio comparison between the portfolio and the benchmark.

INVESTMENT AND PORTFOLIO
MANAGEMENT

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
PART 1............................................................................................................................................1
(A)Selection of companies..........................................................................................................1
(b)Asset allocation by using judgement and theories..................................................................3
© Selection of benchmark index in order to evaluate firm performance....................................3
Part 2................................................................................................................................................4
Performance of portfolio and reason for change in return...........................................................4
Part 3................................................................................................................................................4
Critical evaluation of performance of portfolio by using Trenyor ratio......................................4
Part 4................................................................................................................................................5
Passive and active management strategy in business..................................................................5
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7
APPENDIX......................................................................................................................................8
Table 1Selection of companies on basis of parameters...................................................................3
Table 2Trenyor ratio performnance.................................................................................................6
Table 3Classification of corpus.....................................................................................................10
Table 4Allocation details...............................................................................................................10
Table 5First week investment........................................................................................................10
Table 6Second week investment...................................................................................................11
Table 7Third portfolio...................................................................................................................11
Table 8Fourth portfolio..................................................................................................................12
Table 9Net return gained on portfolio...........................................................................................13
Table 10Benchmark return and portfolio return............................................................................13
Table 11Portfolio comparison.......................................................................................................13
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INTRODUCTION
Portfolio construction is the art that portfolio managers have where they determine such
combination of securities which lead to less risk and maximum return in business. In the current
report portfolio is constructed and under this three sectors are taken in to account namely
healthcare, aviation and media sector. Under these three sectors individually two firms are taken
in account. In healthcare sector two majors namely Astrazeneca and GSK are taken into account.
In case of aviation sector Easyjet and Ryanair are selected and along with this in media sector
WPP plc and Sky plc is taken into account. For construction of portfolio fundamentals of stocks
and news that were prevalied in the market are taken in to account. At end of the report in order
to measure performance of the portfolio Trenyor ratio is taken in to account and in this way firms
are selected and portfolio is constructed in the report.
PART 1
(A)Selection of companies
Table 1Selection of companies on basis of parameters
Healthcare PE
Industry PE
ratio
EP
S Earnings growth rate
AstraZeneca
23.
39 33 2.8
Growth rate is low but firm is working on
multiple projects
GlaxoSmith
Kline
28.
17 33
0.4
8 Growth rate is high
Aviation
Easy jet
9.2
9 33 108 Growth rate is moderate
Ryanair
14.
49 33
1.1
7 Growth rate is high
Media
sector
Sky plc
16.
19 33
40.
61 Robust growth rate
WPP plc
9.3
9 33
1.3
8 Robust growth rate
Portfolio construction is the art and one need to consider multiple factors while constructing
portoflio. It can be seen from above table that six firms are taken in to account from three
different sectors namely healthcare, aviation and media sector. It can be observed that in
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healthcare sector there are two firms that are taken in to account namely AstraZeneca and
Glaxosmithklin. Apart from this, in other industry like aviation industry two firms that are
selected is Easyjet and Ryanair. In media sector firms take are Sky plc and WPP plc. These three
sectors are taken in to account because of several reasons. Healthcare sector is one of fastest
growing domain across the world. In single tim relevant firms carry out multiple projects and
with cancelation of patent of any drug firms launch generic drug in market and earn good amount
of profit. Thus, there is scope of earning of good amount of profit in the business (Bodie, 2013).
Hence, healthcare sector is taken in to account. AstraZeneca is one of pharma firm that is taken
into account. Currently, firm is earning less profit in its business but it is expected that in near
time its stocks may generate good return because firm is carrying on multiple project in respect
to development of generic drugs (Astrazeneca plc, 2017). Filling for some of drug in done in
USFDA by considering nearby expiry of patents of few of medicines. Hence, in future good
return can be generated by firm stocks. Glaxosmithkline is another firm that is taken in to
account because it is one of the fastest growing firm across the globe and currently performing
well in the market (GlaxoSmithKline plc, 2017). There is positive sentiments about firm in the
market among investors and due to this reason it is expected that good amount of return will be
generated by the business firm.
Aviation sector is also growing in UK as toruism in category of business, students and
other increased at fast rate in past couple of years. On this basis it is estimaetd that good amount
of return can be generated by firms operating in this sector. In case of aviation sector there are
two firms namely Easyjet and Ryanair. Easyjet is the low cost airline company in UK and it is
giving stiff competition to firms like British Airways. Currently, firm is looking for expanding its
operations on new routes and improving operations internally (Easyjet plc, 2017). Thus, it can be
said that Easyjet is the one of the best choice as its PE ratio is below market and EPS is perfect.
Ryanair is another firm that is selected as it is currently focusing on its fleet capability in terms
of enhancement in its size (Xidonas, Mavrotas and Psarras, 2010). Firm will expand its business
operations in upcoming time period. PE ratio of firm is 14.49 which is less then market PE ratio
which is 33 and on this basis it can be said that firm shares are undervalued and there is scope for
growth in firm shares (Ryanair Holdings plc, 2017).
Media sector is another domain that is increasing at fast pace and people are looking for
more and more entertainment so that stress level can be reduced to great extent. PE ratio in case
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of firm Sky plc is 16.19 which is less then market and this means shares are undervalued. Sky plc
genrated huge amount of revenue in its business and sales growth rate is quite high which make
firm performance impressive (Sky plc, 2017). On this basis it can be said that good choice is
made for portfolio construction. Apart from this, other company taken in to account is WPP plc
which is one of the fastest growing company in UK. Firm is currently innovating its business
operations and this technology innovation may boost firm sales in upcoming time period. By
considering this factor business firm is selected in portfolio (WPP plc, 2017). PE ratio of WPP
plc is 9.39 and same of industry is 33. This means firm shares are undervalued and EPS is 1.38
and on this basis it can be said that it is one of the best option to make investment in portfolio.
(b)Asset allocation by using judgement and theories
Asset allocation play an important role in determining return that can gained on portfolio.
This is because if one will give more proportion to an asset that give less return that those assets
that give higher return then in that situation portoflio can not give high amount of return to the
investors. On other hand, if higher proportion is given to assset that generate good amount of
return and less to those assets that generate less return in business then in that situation portfolio
can generate good amount of return for investor (Kemp, 2011). Hence, it can be said that there is
huge significence of asset allocation in portfolio management. Main aim of portfolio is earn
return of 16% on annual basis and in order to earn return of target amount majority of portion
which is 80% given to equity and 20% portion is given to debt. Majority of portion is given to
equity because debt does not generate good amount of return in business it simply guarantee that
principle amount will be safe and low amount of return will be earned which is fixed will be
earned on invested amount. Markwowitz portfolio theory is taken in to consideration for
portfolio construction as this theory state that in the portfolio allocation made must be
diversified in nature. This is because by doing so risk can be controlled and reduced as well as
good amount of return can be earned on invested amount. By following this theory both equity
and debt are taken in to account as proportion of equity is kept 80% and same of debt is 20%. In
equity also there are six stocks on which allocated cash is utilized. Apart from this, in debt across
six corporate bond and government bond invstment is made. This reflects that allocation is made
in proper manner to earn target return of 16%.
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© Selection of benchmark index in order to evaluate firm performance
As part of benchmark FTSE 100 unit trust is taken in to account because 80% of
investment is made in the equity and remaining amount is invested in debt. It must be noted that
because large portion must be invested in equity there is need to take equity index as benchmark.
Due to this reason FTSE 100 unit trust is taken in to consideration as benchmark. This mutual
fund is basically an index fund where in specific proportion investment is made in the company
stocks. It must be noted that index funds are those funds where proportion that securities have in
the index is taken in to account for allocation of fund for specific security in the portfolio that is
constructed in respect to mutual fund scheme (Chaves and et.al., 2010). Elements of the portfolio
also belonged to the FTSE 100 index and due to this reason FTSE 100 unit trust is taken in to
account. Thus, it can be said that appropriate mutual fund scheme is taken in to account as
benchmark index for the current portfolio that is prepared and discussed in the report.
Part 2
Performance of portfolio and reason for change in return
It can be observed that in portfolio return gained on Astrazeenca declined consistently as
it can be observed that in February month there was high level of uncertainity and turmoil in the
market. Due to all these reasons investors loose confidence in the market and they sale their
units. Consistent increase in sales pressure decrease in demand lead to decline in share price.
Same thing is observed in case of other pharmaceutical firm which is GSK. In case of Ryanair
and Easyjet also flcutuation is observed and sometimes positive and sometimes negative returns
are observed (How has the BREXIST vote affected the UK economy?February verdict., 2017). In
month of February due to BREXIT factor negative comments given by many experts give
negative information to the general public. It must be observed that this create negative
investment sentiments and due to this reason less people make purchase and share price
tumbeled down. Same trend is observed in case of firms that are in media sector. Thus, overall it
can be said that news of BREEXIT and poor economic condition at global level are one of the
basic reason that are responsible for fluctuation in return in February month.
Part 3
Critical evaluation of performance of portfolio by using Trenyor ratio
Trenyor ratio reflect return that is earned on each unit of risk that is taken on investment.
It must be noted that here risk is measured by using beta not by using standard deviation which is
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used in Sharpe ratio. Simply in Trenyor ratio from return risk free rate of return is subtracted and
it is divided by beta and standard deviation. Results obtained in respect to Trenyor ratio are given
below.
Table 2Trenyor ratio performnance
Trenyor ratio of portfolio 6%
Trenyor ratio of benchmark 5%
It can be seen from table given above that Trenyor ratio of portfolio is 6% and same of
benchmark index is 5% which reflect that higher amount of return is earned in case of portfolio
then benchmark for each unit of risk that is taken on investment and meausred by using beta. It
can be said that portfolio successfully beat market and 1% return extra is earned on portfolio
relative to benchmark (Guerard, Markowitz and Xu, 2013). It can be said that Trenyor ratio is the
one of the most important measure that is taken in to account for computing return that is earned
on each unit of risk that is taken in the business. Sharpe ratio is also another alternative that can
be used to meaure same thing. It depend on the investor that which of the approach it taken in to
account for measuring return gained on taking risk. Both approaches are easy to use. Howeevr, it
can be said that Trenyor ratio application is easy then Sharpe ratio because in case of latter one
for portfolio standard deviation need to be calculated which is very tough task. This is because
more is the number of security like 10 to 30 more will be lenghty formula of standard deviation.
This problem is not observed in respect to beta because in case of same one need to compute
percentage change in return that is observed in case of portfolio and benchmark. By using
SLOPE function of excel beta can be computed easily. Thus, it is easy to use Trenyor ratio then
Sharpe ratio for portfolio performance evaluation.
Part 4
Passive and active management strategy in business
Passive and active investment management strategy are one of the two main tactics that
are followed in management of investment portfolio. Both these strategies have their own
strength and weakness. It can be observed that active investment management strategy is one
under which frequently portfolio units are changed so that minium loss to the return can be
allowed in case market is volatile in nature. On other hand, there is other strategy which is
passive strategy under which once investment is made in specific security it is not sold off
quickly in the market. Security is hold for the market duration that is determined while portfolio
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was constructed. Thus, it can be said that both active and passive strategy are opposite of each
other (Bodie, 2013). It must be noted that disadvantage of passive strategy is that if investment is
made for long term when market is in declining stage heavy loss is faced on investment. In case
of portoflio prepared passive strategy is followed as it can be observed that investment in any
unit or company is not changed and all positions were long. Similarly, in case of benchmark also
same thing is observed as it is also passive fund. Thus, it can be said that there is absence of
divergence between portfolio and benchmark. Investment was made for short term which is just
4 weeks and due to this reason no need was observed to sale any of position from portfolio.
CONCLUSION
On the basis of above discussion it is concluded that there is significent importance
portfolio management for the business firms. There are number of tools and techniques that can
be used in construction of portfolio. It depend on the portfolio manager that which of method it
think is appropriate for portfolio construction. In order to construct portofolio basically one must
take in to account economic environment, press release and firm fundamentals. On the basis of
these factors it can be identified whether stock will be able to perform better in the market. This
is one of the important aspect that must always be remembered while constructing portfolio.
Apart from this, one have to select appropriate strategy which may be active or passive portfolio
strategy. There are advantage and disadvantage of both strategies and while selecting one of
them investor must consider number of factors. It is also concluded that in order to measure
performance of portfolio appropriate benchmark must be determined so that performance can be
measured accurately.
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REFERENCES
Books and Journals
Bodie, Z., 2013. Investments. McGraw-Hill.
Chaves, D. and et.al., 2011. Risk parity portfolio vs. other asset allocation heuristic
portfolios. The Journal of Investing. 20(1). pp.108-118.
Guerard, J.B., Markowitz, H. and Xu, G., 2013. Global stock selection modeling and efficient
portfolio construction and management. The Journal of Investing. 22(4). pp.121-128.
Kemp, M., 2011. Extreme Events-Robust Portfolio Construction in the Presence of Fat Tails.
John Wiley & Sons.
Xidonas, P., Mavrotas, G. and Psarras, J., 2010. Equity portfolio construction and selection using
multiobjective mathematical programming. Journal of Global Optimization. 47(2). pp.185-
209.
Online
How has the BREXIST vote affected the UK economy?February verdict., 2017. [Online].
Available through:<
https://www.theguardian.com/business/ng-interactive/2017/feb/22/how-has-the-brexit-vote-
affected-the-uk-economy-february-verdict>.
Astrazeneca plc, 2017. [Online]. Available through:<
https://www.bloomberg.com/quote/AZN:LN>.
GlaxoSmithKline plc, 2017. [Online]. Available through:<
https://www.bloomberg.com/quote/GSK:LN>.
Easyjet plc, 2017. [Online]. Available through:< https://www.bloomberg.com/quote/EZJ:LN>.
Ryanair Holdings plc, 2017. [Online]. Available through:<
https://www.bloomberg.com/quote/RYA:ID>.
Sky plc, 2017. [Online]. Available through:< https://www.bloomberg.com/quote/SKY:LN>.
WPP plc, 2017. [Online]. Available through:< https://www.bloomberg.com/quote/WPP:LN>.
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APPENDIX
Table 3Classification of corpus
Investment amount 12,000,000
Equity` 80% 9600000
Debt 20% 2408180
Table 4Allocation details
Price on
Feb 1 Value
Uni
ts
Price on
Feb 1 Value
Unit
s
AstraZeneca 4194
41940
00
100
0 3i group 128.25
25650
0 2000
Glaxosmithk
line 1535
30700
00
200
0 A2D funding plc 108 75600 700
Easyjet 935
56100
0 600 BG Transco 209.26
14648
20 7000
Ryanair 14.36 64620
450
0
Alpha plus
holdings plc 106.31 74417 700
Sky plc 1001
60060
0 600
Anglo American
capital 106.15
53075
0 5000
WPP plc 1836
11016
00 600
UK guilt 2 year
yield 0.14 6020
4300
0
Sum
95918
20 Sum
24081
07
Tally 8180 Tally 73
Table 5First week investment
Price on
Feb 1 7-Feb
Shar
es
Value on
Feb 1
Value on 7
Feb
Net
gain/loss
AstraZeneca 4194.00
4449.
50 1000 4194000.00 4449500 255500.00
Glaxosmithkline 1535.00
1562.
50 2000 3070000.00 3125000 55000.00
Easyjet 935.00
923.0
0 600 561000.00 553800 -7200.00
Ryanair 14.36 13.96 4500 64620.00 62820 -1800.00
Sky plc 1001.00
1006.
60 600 600600.00 603960 3360.00
WPP plc 1836.00
1838.
00 600 1101600.00 1102800 1200.00
3i group 128.25
101.0
0 2000 256500.00 202000 -54500.00
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A2D funding plc 108.00
108.1
2 700 75600.00 75684 84.00
BG Transco 209.26
209.2
5 7000 1464820.00 1464750 -70.00
Alpha plus holdings
plc 106.31
106.3
0 700 74417.00 74410 -7.00
Anglo American
capital 106.15
106.1
5 5000 530750.00 530750 0.00
UK guilt 2 year
yield 0.14 0.09
4300
0 6020.00 3784 -2236.00
249331.00
Table 6Second week investment
7-Feb 14-Feb Units
Value on 7
Feb
Value on 14
Feb
Net
gain/loss
AstraZeneca
4449.5
0
4684.0
0 1000 4449500.00 4684000 234500.00
Glaxosmithkline
1562.5
0
1580.0
0 2000 3125000.00 3160000 35000.00
Easyjet 923.00 955.00 600 553800.00 573000 19200.00
Ryanair 13.96 14.35 4500 62820.00 64575 1755.00
Sky plc
1006.6
0
1002.5
0 600 603960.00 601500 -2460.00
WPP plc
1838.0
0
1891.0
0 600 1102800.00 1134600 31800.00
3i group 101.00 128.12 2000 202000.00 256240 54240.00
A2D funding plc 108.12 108.50 700 75684.00 75950 266.00
BG Transco 209.25 209.28 7000 1464750.00 1464960 210.00
Alpha plus holdings
plc 106.30 106.33 700 74410.00 74431 21.00
Anglo American
capital 106.15 107.00 5000 530750.00 535000 4250.00
UK guilt 2 year yield 0.09 0.12
4300
0 3784.00 4988 1204.00
379986.00
Table 7Third portfolio
2/14/20
17
2/21/20
17 Units
Value on 14th
Feb
Value on 21st
Feb
Net
gain/loss
AstraZeneca
4684.0
0
4562.0
0
1000.0
0 4684000 4562000 -122000
Glaxosmithkline
1580.0
0
1645.0
0
2000.0
0 3160000 3290000 130000
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Easyjet 955.00 955.50 600.00 573000 573300 300
Ryanair 14.35 14.27
4500.0
0 64575 64215 -360
Sky plc
1002.5
0 995.00 600.00 601500 597000 -4500
WPP plc
1891.0
0
1880.0
0 600.00 1134600 1128000 -6600
3i group 128.12 129.25
2000.0
0 256240 258500 2260
A2D funding plc 108.50 108.60 700.00 75950 76020 70
BG Transco 209.28 209.25
7000.0
0 1464960 1464750 -210
Alpha plus
holdings plc 106.33 106.33 700.00 74431 74431 0
Anglo American
capital 107.00 109.05
5000.0
0 535000 545250 10250
UK guilt 2 year
yield 0.12 0.09
43000.
00 4988 4042 -946
8264
Table 8Fourth portfolio
2/21/2
017
Price on on
Feb 28 Units
Value on
21st Feb
Value on
28th Feb
Net
gain/loss
AstraZeneca
4562.0
0 4644.00
1000.
00 4562000 4644000 82000
Glaxosmithkline
1645.0
0 1648.00
2000.
00 3290000 3296000 6000
Easyjet 955.50 958.00
600.0
0 573300 574800 1500
Ryanair 14.27 14.28
4500.
00 64215 64260 45
Sky plc 995.00 998.00
600.0
0 597000 598800 1800
WPP plc
1880.0
0 1921.00
600.0
0 1128000 1152600 24600
3i group 129.25 130.00
2000.
00 258500 260000 1500
A2D funding plc 108.60 110.00
700.0
0 76020 77000 980
BG Transco 209.25 208.50
7000.
00 1464750 1459500 -5250
Alpha plus
holdings plc 106.33 106.38
700.0
0 74431 74466 35
Anglo American 109.05 109.41 5000. 545250 547050 1800
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capital 00
UK guilt 2 year
yield 0.09 0.09
43000
.00 4042 3956 -86
114924
Table 9Net return gained on portfolio
Total gain/loss 752578.00
Return 6%
Loan taken 12,000,000
Interest rate 1.0025
Net return on portfolio 5.27%
Table 10Benchmark return and portfolio return
7IM AAP Adventurous Fund
A Acc
February 55.6
March 57.9
Percentage change 4%
Portfolio return 5.27%
Table 11Portfolio comparison
Beta Weight Beta*weight
AstraZeneca 1.03 0.3495 0.359985
Glaxosmithkline 1.19 0.255833333 0.304441667
Easyjet 0.59 0.04675 0.0275825
Ryanair 1.01 0.005385 0.00543885
Sky plc 0.95 0.05005 0.0475475
WPP plc 1.19 0.0918 0.109242
3i group 0 0.021375 0
A2D funding plc 0 0.0063 0
BG Transco 0 0.122068333 0
Alpha plus holdings plc 0 0.006201417 0
Anglo American capital 0 0.044229167 0
UK guilt 2 year yield 0 0.000501667 0
Portfolio beta 0.854237517
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UK 3 month treaury bill rate 0.16
Trenyor ratio of portfolio 6%
Trenyor ratio of benchmark 5%
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