Financial Markets and Portfolio Management Analysis Report - AAF0406

This report provides an in-depth analysis of financial markets and portfolio management, focusing on the performance of various stocks like Tesco, Tesla, Toyota Motors, and Shell Plc. It includes calculations of average stock values, returns, covariance, and correlation to assess business performance. The report utilizes the CAPM model to determine beta and its impact on a portfolio, and evaluates mean returns to identify overpriced or underpriced stocks. Furthermore, it assesses the potential of different stocks for investor returns, defining portfolio risk, return, and the concept of a Minimum Variance Portfolio. The report designs a portfolio with a minimum annual return of 10%, calculates the Sharpe ratio and alpha, and offers recommendations for clients. The analysis aims to provide a comprehensive understanding of financial market dynamics and portfolio construction strategies. The report also covers different types of portfolios such as aggressive, defensive, income, and hybrid portfolios.

Financial Markets and
Portfolio Management
AAF0406

Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
SECTION A.....................................................................................................................................3
A. Comment on the performance of the business and analyse various statistical tools to
determine the performance of the business.................................................................................3
B. Calculate Covariance and correlation between the stocks and comment on the results of the
outcome........................................................................................................................................4
C. Using CAPM Model ascertain the beta of the company and its impact on the portfolio.......4
D. Explain the mean return of the stock and state whether the stock is over priced or under
priced...........................................................................................................................................6
SECTION 2.....................................................................................................................................6
A. Evaluate the two stocks which will provide more return to the investor................................6
B). Define the risk and return of the portfolio mix and also explain the meaning of Minimum
Variance Portfolio........................................................................................................................6
C). Design portfolio with the minimum annual return more than 10%.......................................7
D). Calculate Sharpe ratio and alpha of the portfolio and explain the measures that needs to be
taken by the client........................................................................................................................7
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................9

INTRODUCTION
The financial market is defined as a market in which people trade financial securities at
the low transaction cost. This includes any place or a system which provides buyers and sellers
the means to trade financial instruments. This facilitates the interaction between those who need
capital with those who have to invest in capital. There are various types of financial market such
as stock market, bond market, commodities market, derivative market. There are various
function of the financial market which provides free and regulated system for the selling and
buying the big amount of money. It is very important for the investors to have the knowledge of
various aspects in order to invest in the appropriate manner and at the right place. This report
will include the calculations of the various aspect which is analysis of the companies from
London stock exchange, and based ion analysis construction of the portfolio (Aboussalah, and
Lee, 2020).
MAIN BODY
SECTION A
A. Comment on the performance of the business and analyse various statistical tools to
determine the performance of the business.
From the data calculated in excel it can be seen that the average value of share of Tesco,
Tesla, Toyota Motors and Shell Plc are 231.13, 460.62, 149.01 and 42.46. this shows the price
which belonged to the stock most of the time in the year. Average return of the stocks shows
that the shares of Tesco provides a return of 23.44% which means that over the period of time it
had provided a return of more than 23.44%. Tesla's return is more than 14 times which suggest
that it can be added to the portfolio to increase the return of the portfolio. Toyota Motors has
provided returns of 42.64% in the recent years. Shell Plc shares have shown negative return of
the company.
Average: Average is the mean of the data given. Average is calculated by adding the values of all
the data and dividing it by the total number of observations (Carlei, and et., al., 2020).

B. Calculate Covariance and correlation between the stocks and comment on the results of the
outcome.
Covariance: In science and insight, covariance is the proportion of the connection
between two irregularities. The measure assesses the extent to which factors change together. All
in all, it's basically the ratio that fluctuates between two factors. Nonetheless, the measure did not
assess dependencies between factors (da Silva, and Vieira, , 2021).
In finance, this idea is mostly used in portfolio assumptions. One of its most common
applications in portfolio assumptions is the scaling technique involving covariance between
resources in a portfolio. Unsystematic gambling can be stifled to some extent by choosing
resources that do not have high deterministic covariance with each other.
Correlation: Connectivity is a measurable term that describes the degree to which two
factors work together. If the two factors move in similar directions, the factors are said to have a
positive connection. If they move in opposite bearings, they have a negative relationship.
C. Using CAPM Model ascertain the beta of the company and its impact on the portfolio.
A venture portfolio is a variety of resources owned by financial backers. The portfolio
can contain risk protection such as securities, stocks, shared reserves, benefit plans, land, and
surprisingly real resources such as gold (coins or bars). Fundamentally, this encompasses every
resource that can increase respect or reward. Many even put resources into important ancient
rarities for future benefits (.Hassan, and et., al., 2021).
An ideal portfolio consists of a series of shifting speculations. This can range from
government bonds to small stocks to foreign currency cash. However, proper handling of your
portfolio is crucial. Any other way, you can get a lower return.

Diversify: When you put your resources into financial exchanges, a decent approach is to
diversify your speculation into different market categories. Along these lines, your entire
portfolio won't last long, whether or not a few areas of the market are affected by a downturn.
Minimum investment cost: A significant cost for financial backers is commission fees and
executive costs. This is especially important if you continue to trade stocks. Consider financial
planning with a rebate business company. These organizations charge substantially lower fees
from customers (Jiang, , Fu, and Ruan, 2019). Likewise, when it comes to financial planning for
long-term goals, it's best not to make choices based on temporary changes. So don't sell your
stock just for a little dunk just yet.
Regular Investment: In order to strengthen your portfolio, it is crucial to contribute consistently.
Not only will this help you expand your wealth over a long period of time, but it will also teach
you a risk-disciplined inclination. Also, as your compensation level goes up, you can try to build
up the sum of your contributions.
Follow-up buying: When you put your resources into another stock, you may not know how
things are performing. So in order not to take risks, it is very wise to try not to put all the
situation in one adventure. All things considered, try to contribute through follow-up techniques.
That is, put some in the stock first. If the stock's performance matches your assumptions, you can
build your interest in the shock design until you reach your full position.
Types of portfolio:
Aggressive Portfolio: As the name suggests, a strong portfolio is an ordinary portfolio with a
more notable challenge in finding decent returns. Stocks in strong portfolios have higher betas
and subsequently experience larger cost changes.
In such a portfolio, monitoring risk in a sound manner is critical. To a large extent,
success depends on taking calamities and taking profits (Laher, Paskaramoorthy, and Van Zyl, ,
2021).
Defensive portfolio: A prudent portfolio is one that includes stocks that do not have high betas.
The stocks in this portfolio are somewhat disconnected from broader market developments. In
this portfolio, the procedure is to reduce the gamble of losing heads.
Typically, a significant portion of a prudent portfolio's assets is designated for fixed payment
protection. If you have a hunger for total security, you can build a protected portfolio.

Income Portfolio: This is a more typical investment portfolio that focuses on speculation that
brings cash from profits or different kinds of grants. Generating positive income, compensation
packages invest resources into organizations that return a portion of their earnings to investors,
rather than an ideal spending state.
It's important to remember that the presentation of stocks in a compensation package depends on
the prevailing financial environment. In a downturn, they could take a hit (Lewin, M. and
Campani,2020).
Hybrid Portfolio: Cross-breed combinations offer a lot of adaptability where you can venture
into potential guesswork like workmanship. Typically, in a semi-variety portfolio, the center
contains blue-chip stocks and certain senior corporate or government securities.
Mixing stocks and bonds to a considerable extent, the cross-variety portfolio offers expansion
across several resource classes, followed by lending strength.
D. Explain the mean return of the stock and state whether the stock is over priced or under
priced.
From the calculated return of the stocks it can be seen that the tesla and Toyota Motors have
provided most return in the previous 3 years which can be seen from the results calculated in the
provided in the excel attached.
SECTION 2
A. Evaluate the two stocks which will provide more return to the investor.
In the following case the client is required to consider two stocks such as Toyota motors
and Tesla which have provided maximum returns in the recent times. Among the two the portion
of Tesla will be comparatively more as it can be seen that the it is most return provided in the
recent times. Thus it will fulfil the minimum the return of the client of 10%. The client can invest
in the ratio of 3:1 in the stocks of Tesla and Toyota Motors which will provide high returns to the
client and avoid to invest in the stocks of Shell Plc because it has provided negative returns in the
long run (Li, and Teo, 2021).
B). Define the risk and return of the portfolio mix and also explain the meaning of Minimum
Variance Portfolio.
The risk associated with the An underlying differential portfolio is a variety of safeguards that
combine to limit the unpredictability of the value of a general portfolio. Instability is part of

security cost development (promising and not-so-promising periods). For example, a
fundamental change portfolio might contain a variety of high-risk stocks, but each one is from a
different sector, or from a comparatively measured organization, so there is no connection
between them. The risk associated with the shares is greater as compared to the other investment
options which averse to risk and fluctuations.
C). Design portfolio with the minimum annual return more than 10%.
Over the period of time it can be seen that the stocks have performed well in order to
increase the return associated with the stocks. The client needs to invest in the shares on regular
interval to reduce the risk associated with the fluctuations of the shares which will help in
average out the price and increase the overall return of the company. In the portfolio, it will
consists of the 50% share of Tesla and rest 50% will be of Toyota Motors to increase the return
as well as reduce the risk associated with the portfolio the client may invest his amount of
$100000 in various stock to reduce the risk associated and maintain the minimum criteria of the
client of 10% (Markowitz, and et., al., 2021).
D). Calculate Sharpe ratio and alpha of the portfolio and explain the measures that needs to be
taken by the client.
Sharpe ratio is used to measure the performance of the assets. It is calculated by firstly
calculating the expected return and subtracting the standard deviation of the excess return, it
measures the volatility. It is calculated in the excel sheet attached. The client may exercise
various measures to reduce the risk and increase the return of the portfolio. In order to increase
the return the client is requested to purchase the shares when the price is low the financial market
which will increase the return of the client. It further needs to study the news related to the
companies whether the companies are performing as well in the future and provides greater
return. External factors may also affect the return associated with the Share (Mensi, Rehman, and
Vo, 2020).
CONCLUSION
From the above report it has been concluded that the financial market is the most
important for the investors and the people who are investing in the various stock market. The
most important for the people of the companies is that they invest in the right place. The analysis
which is given above shows that the companies investing the stock can help them to invest more

in further securities which helps the organisation to increase their brand value and revenues. The
securities of the company are high then the company need to invest more in the stock market.
The various calculations of the companies which is considered on the basis of their share prices
suggests that the company have the high marketable securities. The comparison of the two
companies which is considered in this report has been created in order to create the portfolio of
the company.

REFERENCES
Books and Journals
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