Valuing Investment Report: Optimal Portfolio and Risk-Free Asset

This report focuses on valuing investments, specifically exploring the concepts of optimal portfolios and risk-free assets. It explains the fundamental principles of optimal portfolios as a combination of investments designed to minimize overall risk and generate consistent returns. The report highlights how optimal portfolios evaluate stock correlations to determine appropriate investment weights and reduce investment risk, referencing key literature. It also discusses the role of risk-free assets in enhancing portfolio returns while mitigating risk, emphasizing that these assets are unaffected by volatile capital markets and can improve the Sharpe ratio. The analysis of a sample portfolio demonstrates how the inclusion of a risk-free asset can increase returns and reduce standard deviation, thereby strengthening the portfolio's overall performance. The report concludes by emphasizing the importance of optimal portfolios and risk-free assets in identifying appropriate asset weights to reduce investment risk and generate higher returns.

Running head: VALUING INVESTMENT
Valuing Investment
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Table of Contents
Task 1:........................................................................................................................................2
F. Explaining the fundamental concept of optimal portfolio, risk free asset in portfolio and
making relevant recommendations:...........................................................................................2
Reference:..................................................................................................................................4

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Task 1:
F. Explaining the fundamental concept of optimal portfolio, risk free asset in portfolio
and making relevant recommendations:
Optimal portfolio of risky assets is a combination of the investment that has been
drafted for lowering the overall risk from total investments in the portfolio. Generation of the
overall Optimal portfolio is mainly helpful in reducing the risk from investment and
generating a constant return. Optimal portfolio directly evaluates the correlation between
stocks and identifies adequate weight for investment, which could be used in generating
higher revenue from investment. Barone-Adesi and Carcano (2015) mentioned that use of
overall optimal portfolio directly allows the investment to reduce the risk by investing in
different weights only on assets for generating higher revenue and declining the risk from
investment. On the other hand, Berndt, Bilolo and Meynhardt (2015) argued that optimal
portfolio does not ensure that investments in the market is risk free and cannot be affected by
the volatile capital market. Hence, it could be assumed that with the help of optimal portfolio
investors able to use combination of different assets that could directly generate returns from
investment.
Furthermore, the use of risk free asset in the portfolio could eventually allow the
organisation to increase the return, while reducing its risk factor. The inclusion of the risk
free asset directly allows the portfolio to generate return comprising of reduced risk.
Moreover, the risk free asset does not react to the volatile capital market, which directly helps
in maintaining constant returns from the portfolio that includes risk free asset. Risk free asset
also allows the investor to directly reduce the risk from high risk assets and generate a
constant return. Hence, in the portfolio depicted in the Excel sheet use of risk free asset could

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eventually help in reducing the risk from investment. The use of risk free portfolio in the
portfolio would eventually help in improving Sharpe ratio, as the overall risk free rate of 8%
will be included in the return that is provided from the portfolio. This would eventually help
in reducing any kind of risk from investment and generate higher return, which could form an
adequate portfolio (Bruder, Kostyuchyk and Roncalli 2016).
From the overall evaluation in the portfolio it could be identified that the return is
relatively 17.22%, while the standard deviation is 5.32% for the portfolio. Hence, the use of
risk free asset in the current portfolio could eventually help in increasing the return, while
declining the standard deviation. This could eventually help in strengthening the portfolio
returns and improve ability of the portfolio to generate higher returns with low risk. Bodie
(2013) mentioned that increment the overall return generation capacity of the portfolio with
lower risk can only be achieved by including risk free asset. Therefore, it could be understood
that use of risk free asset in the portfolio could eventually allow the investor to reduce the
risk further and generate higher returns. Furthermore, the organisation using optimal portfolio
with risk free asset could eventually help in identifying the adequate weight of the portfolio
assets which could reduce risk from investment.

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Reference:
Barone-Adesi, G. and Carcano, N. eds., 2015. Modern Multi-Factor Analysis of Bond
Portfolios: Critical Implications for Hedging and Investing. Springer.
Berndt, T., Bilolo, C. and Meynhardt, T., 2015. Investing in Legitimacy: A Performance
Analysis of Public Value Stock Portfolios.
Bodie, Z., 2013. Investments. McGraw-Hill.
Bruder, B., Kostyuchyk, N. and Roncalli, T., 2016. Risk Parity Portfolios with Skewness
Risk: An Application to Factor Investing and Alternative Risk Premia.