FIN 350 Portfolio Management: Efficient Portfolio Analysis Australia

This report provides an analysis of an efficient portfolio in the Australian market, focusing on the benefits of optimal portfolio selection for investors. It explores the concept of the efficient frontier, introduced by Harry Markowitz, and its graphical representation of risk-return trade-offs. The report uses daily equity data from 2015-2018 to construct a portfolio of four stocks from different sectors, evaluating their performance and risk. It further discusses the application of separation property and Sharpe performance measure in portfolio management, comparing the Markowitz model with the Sharpe single index model for optimal portfolio construction. The analysis concludes that efficient portfolios offer expected returns and that models like Markowitz and Sharpe are instrumental in creating and evaluating optimal portfolios for investment growth.

Finance portfolio management
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Introduction
The efficient portfolio offers various benefits to the investors and also the financial market.
Selection of optimal portfolio offers the maximum return to the investors and also helps them to
diversify or set off the risk with other security return. This report will represent that how optimal
portfolio impact positively to the investors and also states that how efficient portfolio frontier
provides an expected return. This report also states that Harry Markowitz and William Sharpe
model helps to the investor in measuring the performance of optimal portfolio and also helps in
creating the optimal portfolio for the future growth and development of an investor in various
manners.
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Analysis of an efficient portfolio in Australia
A selection of an efficient portfolio provides a source of income to the investors. The process of
selection a portfolio may be divided into two parts. The first part commences with experience
and observation and completes with beliefs about the future performances of available securities.
The second part commences with the appropriate beliefs about future performances and
completes with the optimal selection of portfolio. The investors can use various techniques of
portfolio selection to measure the expected returns and level of risk (Pavlou, Doumpos, &
Zopounidis, 2018).
Efficient Frontier
The efficient frontier is the set of ideal or optimal portfolios which provides maximum expected
return to the investors with defined level of risk. This concept is basically introduced by “Harry
Markowitz” and it is easily to understand. Efficient frontier is a graphical representation of all
optimal securities. It is basically shows the risk and returns trade- off of a portfolio and help to
the investors in imagine the efficient portfolios (Chandra, 2017).
Harry Markowitz’s modern portfolio theory described efficient frontier in an appropriate manner.
Efficient portfolio frontier is related to the Markowitz’s portfolio theory which are discussed
below and represented in a diagram.
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Figure 1: Efficient Frontier
By Author, 2019
 The above graph shows all the results of various portfolio combinations of risky assets. In the
graph standard deviation is lie on the X-axis and return is lie on the Y-axis.
 Tangency Portfolio is the point where the portfolio of only risk- free securities meets the
combination of risky securities.
 The Capital allocation line or straight line shows a portfolio of all the risk-free securities and
risky securities, which is generally a government bond.
 Lower section of the hyperbole of portfolio will have poor return and ultimately maximum risk
to the investors. Portfolios to the right will have maximum returns but also maximum risk.
 Markowitz Portfolio Concept is the base idea of the “Ways to Wealth Concept”
Efficient portfolio importance for the last two decades in Australia
An efficient portfolio helps to the investors to earn more return from the market. The purpose of
efficient frontier is to maximize returns while minimizing volatility. A risk-opposed investor’s
aim is to find out the combination of investment which harvests the maximum return with little
bit risk which is affordable by him. The efficient frontier plot portfolio that gives the identical
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risk- returns trade-off. The last two decades in Australia, the investors use the efficient portfolio
frontier to find out each investment returns and the level of risk associated with them (Clarke, De
Silva, & Thorley, 2016).
For example:
Mr. A has two securities, Security A and Security B, for investment. The following table
shows Mr. A expectation for expected return and standard deviation:
Securities Expected return (Er) Standard Deviation
A 12% 6%
B 8% 4%
The correlation coefficient between returns on both assets is estimated to be 0.6
Following table represents Mr. A portfolio’s standard deviation and expected return at different
mix of A and B
Security A Weight Security B Weight Portfolio Standard
Deviation
Portfolio Standard
Deviation
100% 0% 6% 12%
80% 20% 4.87% 11.20%
60% 40% 3.94% 10.4%
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40% 60% 3.39% 9.60%
20% 80% 3.42% 8.80%
0% 100% 4% 8%
The above result can be plotted to get the following graph. It is also known as efficient frontier.
Conclusion: Portfolio combination at C and D are better than A and B because they provide
maximum estimated return for the same level of risk.
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With the help of this the investor can know level of risk associate with the investment and also
find out the highest level of return from the investment.
Trend line
In a technical analysis, a trend lines are important tool for both trend identification and
confirmation in the capital market. Trend analysis is a straight line that joins two or more price
point and then spreads into the upcoming period to act as a support line and resistance (Edwards,
Magee, & Bassetti, 2018).
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Uptrend market is selected for the creation of portfolio:
Figure 2: Uptrend Line
By Author, 2018
This trend line shows a positive slope in the graph to the investors and is formed by connecting
two or more low points. It is also support and shows that net- demand is growing up even as the
rise price. The uptrend line is also considered as compact and integral. A growing price
associated with rising demand is very bullish and indicates a strong fortitude on the part of the
purchasers.
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Daily Data of Equity for the period January 2015-December 2018.
2015
2016
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2017
2018
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Construction of portfolio (four stocks)
Aristocrat Leisure Limited
Type of Company: Consumer Discretionary
Manufactures, designs, develops and markets a different variety of products and services
comprising electronic gaming machines, casino, digital social games and management systems.
CSL Limited
Type of Company: Health Care
Expansion, marketing and manufacturing of pharmaceutical and investigative products, human
plasma fractions and cell culture media.
WOW (WOOLWORTHS GROUP LIMITED)
Type of Company: Consumer Staples
General merchandise, food and specialty retailing through chain store operations.
WES (WESFARMERS LIMITED)
Type of Company: Consumer Discretionary
Expanded industrial with benefits comprising operations of retail covering general merchandise,
supermarkets and specialty divisions stores, liquor and fuel outlets and office supplies and home
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