Assignment on Portfolio Management

Running head: PORTFOLIO MANAGEMENT
Portfolio Management
Name of the Student:
Name of the University:
Author Note:

PORTFOLIO MANAGEMENT1
Table of Contents
Introduction:...............................................................................................................................2
Discussion:.................................................................................................................................2
Portfolio Construction:...........................................................................................................2
Importance of Diversification:...............................................................................................3
Stock Return and the Correlation:..........................................................................................5
Portfolio Opportunity Set:......................................................................................................6
Optimal Risky Portfolio, Capital Allocation Line and minimum variance portfolio:...........7
Comparison between the Two Portfolios:..............................................................................9
Conclusion:..............................................................................................................................10
References:...............................................................................................................................11

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Introduction:
Modern portfolio theory highlights the concept of optimal risky portfolio and the
minimum variance portfolio in the investment universe. The investment universe highlights
the use of various asset classes for the purpose of investment of an investor’s portfolio. An
investor can be having different risk preference and return preference according to which a
portfolio manager makes investment decisions. The asset classes can be characterized as
bonds, equity, alternative investment and many other types of hybrid securities which is
included by the portfolio manager as per the risk return profile of the investor (Johannes
2018).
The report presented below aims to highlight the various theoretical concepts of the
modern portfolio theory. This report provides the efficient frontier or the investment
opportunity set of the securities selected for the portfolio. It also highlights the optimal risky
portfolio and the minimum variance portfolio of the securities. Also it tends to provide an
insight of the benefits of diversification which can be achieved by the mix of the securities in
the portfolio.
Discussion and Analysis
Historical Data
The historical data has been well collected for a sum of five year whereby relevant
changes in the stock price on a monthly basis has been considered. The monthly closing price
for each of the stock from the time period January 2015 to December 2019 has been well
considered for analysis purpose. The two stocks which have been selected for the portfolio
have provided the following return which would be used in the calculation of the portfolio
return. The historical stock price movements of the stocks have been taken for a period of 5

PORTFOLIO MANAGEMENT3
years over monthly basis. The average return and the volatility of the stocks is calculated
along with the correlation of the stocks in the image below,
Singapore Airlines Limited United OverseasBank Limited
Average Monthly Return -0.0040 Average Monthly Return 0.0038
Average Monthly Standard Deviation 0.03931595 Average Monthly Standard Deviation 0.0539943
Annualised Expected Returns -0.0484429 Annualised Expected Returns 0.04606107
Annualised Standard Deviations 0.13619446 Annualised Standard Deviations 0.18704173
Correlation 0.2734071
Image 1: Stock Return, Volatility and Correlation
Source: By the Author
The return from the stock of the company Singapore Airlines is negative 4.84% while
the volatility of the stock is 13.62%. The return from the stock of UOB Stock is 4.61% and
the volatility is 18.70%. From a standard deviation perspective the UOB Stock is more risky
than the company Singapore Airlines which is highlighted by the level of volatility. The
correlation among the stocks is negative 0.27 times, which highlights that the benefits of
diversification would be received in the portfolio as the correlation between the two set of
stocks is comparatively less. Thus the above data which has been calculated would be used in
the calculation of the efficient frontier, the minimum variance portfolio, optimal risky
portfolio ahead (Sissy, Amidu and Abor 2017).
Portfolio Construction:
The construction of portfolio as per the modern portfolio theory requires the selection
of the asset classes as per the strategic asset allocation along with the selection of securities
within those asset classes. Thus the asset classes are selected as per the risk return profile of
the investor where higher risk preference leads to the selection of risky assets and lower risk
tolerance level leads to selection of less risky assets. The less risky assets can be classified as
government securities or sovereign bonds which provide lower returns due to lower risk in