Investment project- Finance - Essay Example

? Investment project- Finance s Investment and risk are the two sides of a same picture. If a coin is tossed then there is always a risk associated with the same. There are number of things associated with the same. According to the provision, it is found, when there is investment, and then there would be a provision of risk as well. Data of five different stocks have been taken into consideration for the same and 5 years of data have been taken into account. Different statistics provision could be taken into account for the same like Average return, Standard Deviation, Correlation and other. Making a portfolio always give something extra ordinary to the investor and investors always like to have making a portfolio, as it not only increase its return but it also decrease the risk association from the same. Passive Investment strategy would be taken into account for the same. Passive investment can also be stated as passive management. It is a financial approach which refers to get hold on active selling and purchase dealings in short term profitability scenarios while having an intension to make investment in secure long term profitability with a minimum usage of resources (John L. Maginn, 2010). The passive investment approach is hugely relied and believes on pre determined strategy where there is no span for any potential anticipation rather strongly belief by fund manager or any financier to invest in long-standing period will be highly cost-effective. The whole stance is to evaluate the investment to its minimum level and to keep away negative impacts in the case of malfunction in order to appropriately forecasting. Passive management is extremely viable in stock market in which index tracker is used to assess the index for equity market (John L. Maginn, 2010). Now days, it is gaining popularity and also being exploited progressively in other types of investment portfolios include bonds, supplies and hedge funds. The passive investing strategy is comprised under the following points: Maintaining a low cost, and to avoid unnecessary transactions Keep considering all the markets and avoid excessive disclosure to a specific industry Investment in the view of long-standing perspective Average Return of the Stocks Five years of return has been taken into consideration for the same. Average means, mean return which has been analyzed from different angles in total. The average return of all of the five stocks are mentioned below,   ANZ Contact Hallenstein SKY CITY Port Of Tarunga NZX 50 MEAN RETURN 15.92% 1.46% 14.90% 4.88% 17.91% 1.23% The mean return of ANZ and Port of Tarunga are two of the major stocks which yields high return in total. The mean return of ANZ is 15.92%, while the mean return of Port of Tarunga is 17.91%. Both of the returns are high in nature. Apart from these two stocks, Hallenstien is yet another stock which has a mean return of 14.90%, while SKY City, Contact and NZX 50 has a mean return of 4.88%, 1.46% and 1.23% respectively. If it is extremely important for Mr. Thompson to put their money in the stocks this yields high return. Leaping over the result right away is not at all a good sign as there are other provisions as well, which could be taken account in the same. If equally dividing the proportion of 2 million then 1/6 = 16.66% would be allocated to each stocks, let’s find the average return in this scenario, = 2,000,000/6 = $ 333,400 In this scenario a net return of 9.38% could be envisaged which increased the financial portfolio of the company to a level of $ 2.18 million. Let’s now examine the standard deviation of each stock and then its correlation. Standard Deviation and Correlation Standard Deviation, Sharpe Ratio and Beta are all the same things and it analyze the essence and involvement of risk in a stock. This particular thing would be quite skeptical and important from the standpoint of an investment and analysts always try to enhance their portfolio by analyzing the same thing in total. The computed S.D of all of the selected stocks for 5 years of period is mentioned below in the table,   ANZ Contact Hallenstein SKY CITY Port Of Tarunga NZX 50 MEAN RETURN 15.92% 1.46% 14.90% 4.88% 17.91% 1.23% STANDARD DEVIATION (?) 49.33% 23.30% 25.97% 26.18% 17.55% 13.79% Mean return of ANZ and Port of Traunga are high, but ANZ has a high standard deviation which is risk. The association of risk is also high in contact, hallenstein and sky city but it is low in NZX 50. It is not right and beneficial for Mr. Thomposon to go with the investment in ANZ because of high S.D of 49.33%. Correlation is yet another important measure for the same and the correlation matrix is mentioned below, Correlation Matrix ANZ Contact Hallenstein SKY CITY Port Of Tarunga NZX 50 ANZ 1           Contact 0.173638101 1         Hallenstein 0.073134398 0.232978226 1       SKY CITY 0.322045252 0.390433166 0.277330083 1     Port Of Tarunga 0.200723776 0.380771057 0.17151402 0.444368359 1   NZX 50 0.345709398 0.620109428 0.382198348 0.662706447 0.51120662 1 From the analysis, it is found that the correlation among all of the selected stocks is in positive. It is important to analyze the same. Portfolio Management Portfolio management is an art for entity under which the selection of appropriate investment opportunities and strategies take place in order to reduce the utmost chances of risk and emphasize to capitalize the investment return as a whole (MAHAJAN, 2009).. Portfolio management signifies to the management of personal investment bonds, stocks, cash or open-end investment which provides an individual to maximize the profits on investment within the limited span of time (MAHAJAN, 2009). In short, portfolio management tool is applied for the supervision of an individual’s investment under the professional leadership of personal finance. The portfolio management is classified under four categories which consist of: Dynamic portfolio management: Under the sphere of Dynamic portfolio management, the selective executives are dynamically associated for trading of securities and develop the trust of an entity by assuring the optimization of earnings. Inactive portfolio management: In this form of portfolio management, the managers are involved in a composition of fixed combination in order to equivalent the present market state of affairs. Flexible Services: In this case, the entity is sanctioned the portfolio officer to take care of him on behalf of his financial needs. In Flexible Services: Investment portfolio manager can only inform the customer what is good and bad for him, however the customer holds the right to evaluate their own judgment. The return of the same which introduced in the portfolio is mentioned below,   ANZ Contact Hallenstein SKY CITY Port Of Tarunga NZX 50 MEAN RETURN 15.92% 1.46% 14.90% 4.88% 17.91% 1.23% STANDARD DEVIATION (?) 49.33% 23.30% 25.97% 26.18% 17.55% 13.79% Proportion 0.4% 1% 1% 3% 30% 65% Return 0.06% 0.01% 0.15% 0.15% 5.37% 0.80% S.D 0.20% 0.23% 0.26% 0.79% 5.27% 8.96% This is the most important provision of the same. In this scenario, the return of the same is 7%, while mean risk associated with the same is 16%. In this scenario, one could say that the return is 7%. The standard deviation of the same is 16% which is quite high. Value at Risk Value at risk (VAR) is a provision of risk which analyze the maximum risk associated with an investment. It is one of the most important tools to analyze the same. The computed VAR of Mr. Thompson’s portfolio is computed as, = 2,000,000 * 95% * Sqrt (365) = $ 362,994 is the maximum amount of loss which could be loss in a portfolio in a one year’s period and 5% chance is that the risk or loss would exceed from this amount. Conclusion From the analysis, it is analyzed that Mr. Thompson could get certain added advantage by investing in the selected stocks of the company. The investment strategy including the proportion should be given in the same scenario in total. Operating in this provision, Mr. Thompson could get an added advantage with the same strategy with high return and reasonable risk association. Recommendation for Contact Energy Contact energy is one of the fastest growing companies of the world. Beta means the risk and it is one of the most important things from the standpoint of an organization. In the field of investment, the association of beta is quite significant indeed.   Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Alpha 6.0031E-05 0.001560701 0.03846413 0.969347261 -0.003013248 0.00313331 -0.003013248 0.00313331 Beta 1.043588759 0.080308877 12.99468756 4.59983E-30 0.885447285 1.201730233 0.885447285 1.201730233 The association of Beta in this scenario is 1.04 which is quite high as compared to the other companies of the world. There are around 261 observations which analyze the correlation and multiple regressions from the analytical procedure. Regression Statistics   Multiple R 0.628223288 R Square 0.3946645 Adjusted R Square 0.392327297 Standard Error 0.02520532 Observations 261 The multiple regressions for Contact Energy is 0.6828, while Regression Square is 0.394, which shows that the relationship of the stocks of the company with other companies is in positive and it will increase or decrease with the movement of each stocks of other company. The chance of error in this prediction could be 2.52%. Here are some of the major recommendations for Contact Energy to increase the market value and capitalization of its stocks, a) The company has to increase its relationship with other companies b) All of the information must be in a row and it must be authentic c) Information could be applied accordingly but it should relates to other companies information d) Systematic risk should be on a lower level and effective actions should have been taken for the same Recommendation for Hallenstein Beta Likewise Contact Energy, there are fact full and dominating recommendations for Hallenstein Beta. The company is also doing a good job as compared to other companies of the world and moving with a perfect consideration.   Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Alpha 0.002476296 0.00206799 1.197440654 0.232229607 -0.00159592 0.006548511 -0.00159592 0.006548511 Beta 0.710864433 0.106412428 6.680276414 1.45037E-10 0.501320745 0.920408121 0.501320745 0.920408121 The alpha and beta in this particular analysis would be considered accordingly. The beta in this particular scenario would be 0.71, which lie is positive node. The movement of Hallenstein Beta is the same as Contact Energy, which is showing that the company is doing a perfect job in this particular scenario. The recommendations is mentioned below, a) Beta should be decreased accordingly b) Information should be get accordingly c) The chance of error in this scenario is 3.33%, which needs to be decrease accordingly Works Cited John L. Maginn, C. D. (2010). Managing Investment Portfolios: A Dynamic Process. New York: John Wiley & Sons. MAHAJAN, A. (2009). Portfolio Management: Theoretical & Empirical Studies. Pune: Global India Publications. Read More