Capital Market Portfolio Report: Investment Strategy and Evaluation

This report presents a comprehensive analysis of a capital market portfolio, focusing on investment strategies, risk management, and return optimization. The report begins with an introduction to capital markets and the rationale behind the selection of securities and bonds, emphasizing diversific...Read More

Capital Market

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
Rationale behind the choice of portfolio.....................................................................................3
Evaluation and application of investment theory........................................................................7
EVALUATION.............................................................................................................................12
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................14

INTRODUCTION
Capital market implies for the financial area where equities and debts are bought and
sold. In the recent times, investors lay high level of emphasis on investing money in the
securities for generating high returns. Further, now investors also make focus on investing
money in the wide range of securities rather than in only one. In other words, investors manage
portfolio for reducing the risk level and making value addition in money. On the basis of cited
case situation, investor has £150000 for investing money in the securities, bonds, derivatives and
combination of the same. Hence, with the motive to earn return from portfolio combination of
securities and bonds have been selected. In this, 3 securities and 2 bonds are selected for
managing the risk level. In this, portfolio period will be from 27th February to 3rd April 2018.
Along with this, for spreading risk level investment is allocated to the securities of different
sector. Here, the main motive of investor is to minimize the risk level and earning suitable
returns from the investment made. In this, report will provide deeper insight about the aspects
considered while making selection of assets and overall portfolio. Further, report will also
develop understanding about the theoretical aspects associated with the investment aspects.
Rationale behind the choice of portfolio
In relation with selecting these industries and analysis their financial strengthen is to
acknowledge the market value of them. Therefore, it will be beneficial to have appropriate
information and knowledge regarding the business strength as investor's point of view. The P/E
ratio of Diageo, Astra Zeneca and Smith & Nephew is on favourable state such as these are more
than 10%. Therefore, it will be beneficial for firm in terms of retaining the that much or return
over their sold securities. In the upcoming time it will benefit the investors to have appropriate
returns on their investments. The PE ration of Diageo is 19.30%, Astra Zeneca as 30.25% and
Smiths and Nephew as 15.30%. On the other side, the beta rate and EPS of these industries are
up to the mark and which will be beneficial to it equity holders to have long-term advantages
from business. In accordance with bonds such as TR28 and V025 which has been selected is on
the basis of their maturity period and weights of these securities in the market. Therefore, V025

has weight of 2% and TR28 as 1%. Thus, to make the investments in these organisations which
will be helpful and beneficial to investors in terms of taking the long terms advantages.
Assets
For avoiding high risk level investment fund has allocated by the investor in 5 assets
include both securities and bonds. Out of 3 securities, 2 has high beta approximately near to 1
which shows high level of volatility. On the other side, one security with low beta has considered
for balancing the risk level. In addition to this, bonds provide investors with fixed returns and are
not subject of high fluctuations. Hence, for avoiding loss at all cost combination of debt and
security has undertaken by the investors.
DGE.L- Diageo Plc:
This is a beverage group which usually serves alcoholic products such as wines, liquors
and beers. There are various brands of this firm such as Guinness, Johnnie Walker, Baileys and
Smirnoff. The performance of organisation is at favourable constant as it has made net sales of
14.5% more than previous year. Moreover, to demonstrate the profitability of the organisation in
context with meeting the requirements such as the beta value of firm is 0.61 which is near to 1.
Thus, it can be said that the changes in share prices of Diageo is not that much fluctuating. On
the other side the EPS is 93.3, it determines that business will have appropriate earning over each
sale of security.
Astra Zeneca:
This is an Anglo-Swedish MNC which deals in pharmaceutical and biopharmaceutical
business. In the year 2013 it moved to Cambridge and has operated research and development in
such pharmaceutical industries. The main aim of this organisation is to develop and manufacture
medicines which will be helpful to the citizens and members which will be helpful in treating the
disorders in gastrointestinal, vascular, psychiatric, respiratory, cardiac, infection, pathology,
oncology and inflammation. The growth of organisation is not that satisfactory as it determined
by the professionals and the external parties. However, it has been argued here that investors
make investments in many shares instead of one which reduces funds for the particular

companies as well as the distribution of funds among several organisations. To analyse Astra
Zeneca's financial condition there will be analysis based on variables.
In relation with the beta value of industry which is 0.57 as it is co-operatively lower than
1. Therefore, it can be said that share value of firm will not be flexible as it will remain constant
for the longer period. Moreover, it will be beneficial for the investors to make investments in
Astra Zeneca.
Smith and Nephew Plc:
This organisation is the producer of medical equipments throughout the world. The firm
is based in UK and manufactures various medical tools such as Wound management products,
trauma, clinic therapy products, orthopaedic and reconstruction products as well as arthroscopy
products. Moreover, in relation with the argument there has been analysis over several variables.
In relation with the market value of this Smith and Nephew plc it has been analysed here
such as the beta value is 0.21 which determines there the share price of this firm will not have
sudden changes as it not flexible. Therefore, the prices will remain same or approximately to the
same for the long period.
V025:
This is the most successful rand in London in terms of Mobile business. Thus, Vodafone
group operates in various nations and have the higher consumer retention. The firm has provided
the bonds as the marketable securities namely V025. Therefore, to analyse the profitability of
this business the market value of bonds were allocated as 29,886.95 than the expected maturity
period of investment is in 2025. Thus, the expected return is 5.63%.
TR28:
These are corporate bonds which were being used by the government in terms with no
guaranteed any return namely Gilts. Therefore, the expected return of this organisation is 6%
which ascertains that the dividends will be payable in every 6 months. Moreover, it was issued
by the UK government on 29th January 1998 which will going to be matured on 7th December
2028.

Share price
VO25 TR28
diageo
plc
AstraZenec
a PLC
Smith
&
Nephe
w plc
FTS
E
2/27/2018 0.0% -0.1% -0.3% -0.4% 0.6% -0.1%
2/28/2018 0.4% 0.4% -0.8% -0.4% -1.2% -0.7%
3/1/2018 0.2% 0.3% -1.2% -0.2% 0.7% -0.8%
3/2/2018 0.0% -0.2% -2.0% -0.6% -1.0% -1.5%
3/5/2018 -0.2% -0.3% 0.9% 1.4% 2.0% 0.7%
3/6/2018 -0.2% -0.2% -0.5% -0.1% 0.2% 0.4%
3/7/2018 0.4% 0.1% -0.4% -0.8% 0.9% 0.2%
3/8/2018 0.1% 0.2% 2.5% 1.2% 1.7% 0.6%
3/9/2018 -0.1% -0.2% 0.2% -0.6% 0.5% 0.3%
3/12/2018 0.0% 0.1% 0.7% 0.3% -0.1% -0.1%
3/13/2018 -0.2% 0.1% -1.7% -0.4% -0.6% -1.1%
3/14/2018 0.3% 0.4% 0.3% -0.4% 0.0% -0.1%
3/15/2018 -0.2% -0.1% 0.4% 0.7% 0.4% 0.1%
3/16/2018 0.0% 0.0% 0.0% 1.4% 0.2% 0.3%
3/19/2018 -0.1% -0.1% -0.9% -0.4% -0.7% -1.7%
3/20/2018 -0.3% -0.3% 0.1% 0.4% -0.4% 0.3%
3/21/2018 -0.4% -0.5% -1.5% -0.2% 0.3% -0.3%
3/22/2018 0.5% 0.8% -0.2% -0.5% -0.7% -1.2%
3/23/2018 0.0% -0.1% -0.7% -0.9% -0.8% -0.4%
3/26/2018 -0.1% -0.1% -0.2% -0.6% 0.5% -0.5%
3/27/2018 0.0% 0.2% 0.4% 2.2% 2.2% 1.6%
3/28/2018 0.3% 0.4% 1.8% 1.6% 1.2% 0.6%
3/29/2018 0.0% 0.1% 0.3% -1.0% -1.4% 0.2%
4/3/2018 0.0% 0.1% 0.0% 0.0% 0.0% -0.4%
(Sources: AstraZeneca PLC. 2018)
(Sources: Smith & Nephew Plc. 2018)
(Sources: Diageo Plc historical prices. 2018)
(Sources: FTSE 100 historical prices. 2018)
(Sources: TR28 bonds. 2018)

(Sources: VO25 bonds. 2018)
VO25 TR28
Diageo
plc
AstraZeneca
PLC
Smith & Nephew
plc FTSE
Average 0.02% 0.05% -0.1% 0.1% 0.2% -0.1%
Standard
deviation 0.23% 0.30% 1.03% 0.89% 0.96% 0.76%
Variance
0.001
%
0.001
% 0.011% 0.008% 0.009%
0.006
%
Risk free return 1.76% 1.76% 1.76% 1.76% 1.76% 1.76%
Evaluation and application of investment theory
It is a hypothesis theory that completely based on the idea of risk-averse investor can
construct a portfolio to optimize and maximize the return of investment. In investment theory
investor can construct cost-efficient subject of chosen portfolio.
Investment styles and asset allocation
Investment style refers to various styles of characteristics of equities, bond, or financial
instruments. Investor style is determined by time period \and content of the investor. Portfolio
financial risk/return and assuming they are precisely set and full rational (KUEHN, Simutin
and Wang, 2017). There are three type of main investment passive or active, value of growth
and small cap or large cap types of investment. Passive statements are lower as it does not
change in fund structure in order to pursuit of high returns (Dhrymes, 2017). Assets
allocation is a strategy that target to balance risk and reward by appropriating portfolio assets.
Assets allocation is a method that suggesting a portfolio risk and rate of return should be
balanced according to investor’s style of investing their capital. In this portfolio company can
consist of one ETF commodity, three bonds and two equity investments. Referring Graham
approach of value investing 70% funds have allocated in securities and rest among 30%.
Equity investment betas
Particulars Weight Beta
Weight * beta
value
Diageo plc .17 .61 .17 * .61 = .10

AstraZeneca PLC .18 0.98 .18 * .98 = .18
Smith & Nephew plc .35 0.21 .35 * .21 = .07
Portfolio beta
(sum of all the
values) .35
From evaluation, it has identified that beta of the portfolio is .35 which in turn neither too
higher nor too lower. Hence, considering such assessment, it can be mentioned that concerned
portfolio highly suits to the low & moderate risk taking attitude of the investors.
Expected portfolio return
Particulars Weight Expected return from the
securities
Weight *
expected
return
Burberry Group plc 0.17 4.51% 0.56%
AstraZeneca PLC 0.18 4.19% 0.75%
Smith & Nephew
plc 0.35 2.28%
0.8%
VO25 0.2 5.63% 1.1%
TR28 0.1 6% 0.6%
Portfolio return
(expected)
3.83%
Tabular presentation depicted above shows that expected portfolio return is 3.83%. On
the basis of this, in against to the risk undertaken by investing money in the combination of
securities investors are expecting 3.83% return.
Efficient market hypothesis:-
This strategy suggests the past and current information is reflected in the prices of shares.
This strategy states it that is impracticable to round the market because stock market ratio cause
active share price always integrated and reflect all relevant information (He and et.al.,

2016). According to this theory stocks are always exchange at their fair value on stock
exchange.
Efficient market hypothesis presents that it is impossible for the investors to beat the
market. The rationale behind this, stock market efficiency has direct influence on existing share
price level. In accordance with efficiency market hypothesis framework, stocks are usually trade
at fair values on stock market (Wang and et.al., 2018). Hence, due to this, it is highly impossible
for the investors to either invest money in undervalued stock or sell the same at inflated price
level. By considering this, it can be presented that it is not possible to outperform the overall
stock market through expert or effectual stock selection or market timing (Kristoufek and
Vosvrda, 2018). Thus, it entails that for gaining higher returns or margin investors need to invest
money in the riskier securities. However, on the critical note, it has assessed that theory
pertaining to efficiency market hypothesis is not appropriate because it emphasizes on
undertaking only riskier investments with the motive to generate high margin.
Capital asset pricing model
CAPM may be served as a modern investment which provides high level of assistance in
ascertaining the required rate of return associated with the particular kind of securities. Usually,
in against to the risk undertaken investors expect some return from the investment made under
securities. Now, CAPM model is widely used by the investors while developing and managing
portfolios (Suntraruk, 2018). Moreover, such model clearly presents expected returns associated
with the securities. Hence, by taking into account such tool investors can assess which asset or
security is offering high return over other. Thus, using CAPM model investors can make idea
about low performing securities. This model is highly effectual which in turn considers time
value of money concept by considering risk free rate of return. CAPM believes that positive
relationship takes place between risk and return (Bao, Diks and Li, 2018). On the basis of this,
return will increase with the rise in risk level. In addition to this, such model considers beta value
that clearly shows the volatility level associated with the securities. In this, stocks with beta
value less than 1 has selected by taking into account moderate risk acceptance attitude level of
the investors. In this, beta value of Diageo plc and Smith & Nephew plc accounts for .61 & .21
respectively.

Expected return (Rj) = Rf + βj (Rm – Rf)
Rf: Risk free return
Βj: Beta value of the securities
Rm: Market return
Risk free rate
Be
ta
Market
return
Expected return from
securities
Diageo plc
1.76% (3 months treasury bill
rate, 2018) .61 4.24% 3.27%
AstraZeneca
PLC 1.76%
0.9
8 4.24% 4.19%
Smith &
Nephew plc 1.76%
0.2
1 4.24% 2.28%
The above depicted table shows that expected return associated with the shares of Diageo
and Smith & Nephew plc implies for 3.27% & 2.28% respectively. On the other side, due to
having risk, as beta accounts for .98, expected return pertaining to the securities of Astra Zeneca
plc is 4.19%. This aspect can be supported from secondary data evaluation which shows that
positive relationship exist between risk and return level.
Modern portfolio theory
This investment theoretical framework places emphasis on minimizing the risk level
which in turn enhances return to the significantly. Modern portfolio entails that investors should
focus on diversification (Takada and et.al., 2018). On the basis of this, investors require
investing money in the combination of assets such as shares, bonds, derivatives etc. As per MPT,
risk involved in the portfolio is determined through the means of correlation takes place within
the stocks (Low and et.al., 2018). Such theory believes that diversification enables investor to
compensate lower return with another which is providing investors with high value appreciation

(Liang and et.al., 2018). Referring this, investment has made in three shares and two bonds for
meeting the purpose of diversification and reducing risk as well as enhancing overall return.
Correlation analysis
VO25 TR28
diageo
plc
AstraZeneca
PLC
Smith &
Nephew plc FTSE
VO25 1
0.89145
05
0.204242
69 -0.0912682 -0.0160903
-
0.124
7
TR28
0.89145
05 1
0.233491
08 0.0673873 -0.0399328
-
0.089
8
diageo plc
0.20424
27
0.23349
11 1 0.597411 0.54496014
0.677
7
AstraZeneca
PLC
-
0.09126
8
0.06738
73
0.597411
05 1 0.7082815
0.674
92
Smith &
Nephew plc
-
0.01609
-
0.03993
28
0.544960
14 0.7082815 1
0.706
7
FTSE
-
0.12466
5
-
0.08984
2
0.677700
68 0.6749161 0.70670455 1
Covariance matrix
VO25 TR28 diageo plc
AstraZenec
a PLC
Smith &
Nephew
plc
VO25
5.1377E-
06
5.99388E
-06
4.64682E-
06
-1.8047E-
06
-3.43283E-
07
TR28
5.9939E-
06
8.79942E
-06
6.95221E-
06
1.74384E-
06
-1.11496E-
06
diageo plc
4.6468E-
06
6.95221E
-06
0.00010075
1 5.2312E-05
5.14866E-
05
AstraZeneca PLC
-
1.8047E-
06
1.74384E
-06 5.2312E-05
7.61035E-
05
5.81584E-
05
Smith & Nephew plc
-
3.4328E-
07
-1.115E-
06
5.14866E-
05
5.81584E-
05
8.85947E-
05

Coupon returns for bonds
VO25 TR28
Investment amount 30000 15000
Annual return 30000 x 5.625 / 100 = £1687.5 15000 x 6 / 100 = £900
5 weeks return £1687.5 / 52 * 5 = 162.26 £900 / 52 * 5 = 86.54
In the context of 5 weeks portfolio, bonds such as VO25 and TR28 provide investors with
£162.26 & £86.54 significantly.
Market rate of return
Particulars Figures
Index on 27.03.2017 7000.10
Index on 03.04.2017 7030.5
Rate of return (7030.5 - 7000.10) / 7000.10
= 0.43%
EVALUATION
The below mentioned table presents return or capital gain associated with the different
securities. For the purpose of evaluation, capital gain is calculated for all the assets included in
investment portfolio. Results of evaluation present that during the five weeks period capital
appreciation takes place in the securities of Smith & Nephew Plc accounts for 4% which in turn
helps in compensating losses associated with other assets. Overall capital gain is £1623.4, out of
which 1321.436 is associated with the shares. It is expected that in the near future Diageo plc
will offer high returns it market cap exceeds 50 billion. This in turn presents high possibilities in
relation to the generation of high returns. It has assessed that expected portfolio return is around
3.84% or 4% significantly. Evaluation depicted below presents that portfolio return is 2%. Such
return is higher in comparison to FTSE 100 return but lower as compared to the expected one.
Referring overall evaluation, it can be depicted that in the context of long run portfolio will offer
more benefits or return.

VO25 TR28 Diageo
plc
AstraZeneca
PLC
Smith &
Nephew plc Sum
Investment size 248 105 10 6 42
Price on £
27.02.2018 121 143.49 2487 4813.5 1254.19
Investment in £
27.02.2018 30000 15000 25500 27000 52500
1500
00
Price on 03.04.2018
(in £)
121.5 145.19
5
2412 4895.5 1307.74
Value on
03.04.2018 (in £)
30123.
97
15178.
235 24120 27460 54741.5
Capital Gain 123.96
69
178.23
542 -1380 459.956 2241.48
Capital gain (in %) 0% 1% -5% 2% 4% 2%
CONCLUSION
By summing up this report, it has been concluded that modern portfolio theory has
employed by the investors pertaining to the investment amount of £150000 respectively. In
accordance with this, funds have allocated in bonds and shares of different sectors. Capital gain
associated with the five weeks portfolio implies for 2%. Further, it has been articulated that
selected bonds have good rating history and offering suitable returns such as 5.625% & 6%. In
addition to this, portfolio beta is .35 which in turn presents that overall risk associated with the
portfolio is highly lower. Along with this, by taking into beta value it can be mentioned that in
the long run Diageo plc securities will offer high returns to the investors. In addition to this, for
the selection of better and structured portfolio several investment theories have considered such
as MPT, CAPM etc which in turn helps investors in getting the desired level of outcomes or
returns.

REFERENCES
Books and Journals
Bao, T., Diks, C. and Li, H., 2018. A generalized CAPM model with asymmetric power
distributed errors with an application to portfolio construction. Economic Modelling. 68.
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Dhrymes, P.J., 2017. Portfolio Theory: Origins, Markowitz and CAPM Based Selection.
In Portfolio Construction, Measurement, and Efficiency. Springer International Publishing.
10(2). pp. 39-48
He, K. and et.al., 2016. Multiscale dependence analysis and portfolio risk modeling for precious
metal markets. Resources Policy. 50(12). pp.224-233.
Kristoufek, L. and Vosvrda, M., 2018. Herding, minority game, market clearing and efficient
markets in a simple spin model framework. Communications in Nonlinear Science and
Numerical Simulation. 54. pp.148-155.
KUEHN, L.A., Simutin, M. and Wang, J.J., 2017. A labor capital asset pricing model. The
Journal of Finance. 12(3). pp.16-39.
Liang, J. and et.al., 2018. Coupling Modern Portfolio Theory and Marxan enhances the
efficiency of Lesser White-fronted Goose’s (Anser erythropus) habitat
conservation. Scientific reports. 8(1). p.214.
Low, R. K .Y. and et.al., 2018. Canonical Vine Copulas in the Context of Modern Portfolio
Management. Asymmetric Dependence in Finance: Diversification, Correlation and
Portfolio Management in Market Downturns. 1. pp.263-289.
Suntraruk, P., 2018. A simple test pf the CAPM Model under Bull and Bear market
conditions. AU Journal of Management. 6(1). pp.62-70.
Takada, H. H. and et.al., 2018. Classical-Equivalent Bayesian Portfolio Optimization for
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Wang, K. H. and et.al., 2018. Does the Efficient Market Hypothesis Fit Military Enterprises in
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Online
3 months treasury bill rate. 2018. [Online]. Available through: <
https://ycharts.com/indicators/3_month_t_bill >.
AstraZeneca PLC. 2018. [Online]. Available through: <
https://finance.yahoo.com/quote/AZN.L/ >.
Diageo Plc historical prices. 2018. [Online]. Available through: <
https://in.finance.yahoo.com/quote/DGE.L/history?
period1=1519583400&period2=1522693800&interval=1d&filter=history&frequency=1d>.
FTSE 100 historical prices. 2018. [Online]. Available through:
<https://finance.yahoo.com/quote/%5EFTSE%3FP%3DFTSE/history/>.
Smith & Nephew Plc. 2018. [Online]. Available through: <
https://au.finance.yahoo.com/quote/SN.L/ >.
TR28 bonds. 2018. [Online]. Available through:
<http://www.londonstockexchange.com/exchange/prices-and-markets/retail-bonds/company-
summary/GB0002404191GBGBPUKGT.html>.
VO25 bonds. 2018. [Online]. Available through: <
http://www.londonstockexchange.com/exchange/prices-and-markets/retail-bonds/company-
summary->.