Analysis of Investment and Risk - Assignment Example

Analysis of Investment and Risk Investment and risk are the two sides of a same picture and inevitably, excluding one factor means it is not possible to complete the overall processes (Cinnamon & Larsen, 2006). In the field of finance, the relevance of investment and risk has its own recognition in the current economic scenario. The association of risk is one of the most important aspects from investment perspective of any organization (Charles & Jones, 2007). Mitigating the risk is an important task, specifically from the dimension of an investment based activity. In applying the methods of mitigating risk, making a portfolio is one of them which is in fact the most suitable and widely used methods in the entire investment industry (Cinnamon & Larsen, 2006). The main theme of this assignment is dependent on two different tasks, therefore, there are two different parts of the assignment. Part-A This part has further been divided into three sub categories: 1) Making of Efficient Portfolios comprising on 10 stocks in total. The companies which have been chosen for this purpose are BG Group, BHP Billion, BP, Barclays, British American Tobacco, HSBC, Glaxo Smith, Glencore, Unilever, Tesco. a) Short selling is one of the noteworthy activities of investment, which means to sell the assets without having its physical possession. The first part of assignment requires making a portfolio with including short selling allowed. For this purpose, following tabular data has been covered: Share Name Mean Return Standard Deviation Proportion with Short Sell BG Group 1.98600 0.19 0.4965 BHP Billton 0.74000 3.5 0.148 BP 0.34000 2.01 0.051 Barclays -0.45000 3.014 -0.045 British American Tobacco 0.98000 1.483 0.049 HSBC 1.25000 5.36 0.1875 GlaxoSmith -1.285 4.77 -0.0257 Glencore -1.222 4.89 -0.03666 Unilever -3.68 5.69 -0.092 Tesco -4.68 4.47 -0.0117 Return & Risk  0.602 3.5377 0.72094         From the tabular formation given above, it can be seen that lots of fluctuation is there among the mean return and standard deviation. The portfolio made with this particular stance would yield a return of 0.72% and a risk level of 3.53%. b) Now suppose that short selling is not allowed, the yields would be: Share Name Mean Return Standard Deviation Proportion with Short Sell not Allowed BG Group 1.98600 0.19 0.4965 BHP Billton 0.74000 3.5 0.148 BP 0.34000 2.01 0 Barclays -0.45000 3.014 0 British American Tobacco 0.98000 1.483 0.245 HSBC 1.25000 5.36 0.3125 GlaxoSmith -1.285 4.77 0 Glencore -1.222 4.89 0 Unilever -3.68 5.69 0 Tesco -4.68 4.47 0 Return & Risk   3.5377 1.202         In this table, it can be found that short selling is not allowed; hence, an investor cannot take any position for a stock which has negative return. The portfolio return is 0.958% with standard deviation with the same 3.53% level. c) In this part, the return would be the same as in the section “b” because short selling is not allowed and 25% can be allotted to a single share. From this particular analysis, it can be said that the portfolio, which has been made without short selling, would yield higher proportion of return in lesser risk adoption as compared to the portfolio in which short selling is allowed. Share Name Mean Return Standard Deviation Proportion BG Group 1.98600 0.19 0.4965 BHP Billton 0.74000 3.5 0.148 BP 0.34000 2.01 0 Barclays -0.45000 3.014 0 British American Tobacco 0.98000 1.483 0.196 HSBC 1.25000 5.36 0.35 GlaxoSmith -1.285 4.77 -0.0257 Glencore -1.222 4.89 -0.03666 Unilever -3.68 5.69 -0.092 Tesco -4.68 4.47 -0.0117 Return & Risk   3.5377 1.02444         2. Plot of Efficient Frontier A single efficient frontier would have been made in this scenario, 3. Capital Market Line In this scenario, in which portfolio has been diversified between 8 stocks and 2 stocks Coca Cola and Google have been given 0 proportions. The average return of this portfolio is 0.822% with the same level of risk as illustrated above. From the analysis, it can be easily found that there are four stocks, which are above the level of CML; while other 6 stocks are located below the CML; hence there are only four stocks that can fill the gap of capital of an investor, while all other asset or shares would come below the level of average return. Part-b There are again two different parts of this particular section as well. a) Incorporating and Applying Various Equity Portfolio Management Strategies Strategies lie at the heart of the investment field and it is one of those things which have a dominant effect over the portfolio (Charles & Jones, 2008; David, 2007). The portfolio selected for the above section comprises on different stocks of different companies. Most of the selected companies specified above are yielding positive result, while there are some shares which are yielding negative values. In pursuance to this, short selling is an excellent idea to cope up with this problem (Masoom, 2008), in which all of the stocks which are yielding negative returns or values would be sold without having its physical possession and then buying the same after some months, when there return level would reach again on the positive level (Masoom, 2008). From the standpoint of a risk adverse investor, hedging techniques can also be applied with derivatives, in which a security would be sold or bought for 3 or 6 months’ time period with its price decided on current date. This action can be taken by an investor, to indulge with a person for derivative based trading in order to increase return and mitigate expenses. b) Industry Analysis and Security Analysis Industry can be analyzed with the help of financial analysis and market share analysis which manifests that how much an industry has been backed with a single company. Industry analysis has a strong relationship with the security analysis (Masoom, 2008). Statistical and financial measures like Co-Variance, Variance and Co-relation analysis are some of the basic tools which can also be applied on a precise portfolio or security to link up its return’s analysis with any of the stock exchange or comparative thing like Standard & Poor (S&P), Dow Jones Industrial Average (DJIA) and many others (Derrick, 1992). With the help of these tools, an analyst can get an idea that out of all, which specific stock is pacing toward or against the portfolio and in which stock, the investor should place their investments. Therefore, these techniques can said to be very reliable and useful means of providing meaningful information that can be used by investors for decision making. References 1. Charles, W & Jones, R (2007), Financial Analysis An Integrated Approach, Oxford University Publications pp. 65-85 2. Charles, W, Hill & Jones (2008), Financial Analysis: An Integrated Approach, John Wiley & Sons Professional Publications, pp. 75-95 3. Cinnamon, R & Larsen, B.H (2006), Financial Analysis, McGraw Hill Publications, pp. 65-75 4. David, F (2007), Financial Analysis, McGraw Hill Publications, pp. 105-112 5. Derrick, M (1992), Financial Analysis, John Wiley and Sons Professional Publications, pp.11-68 6. Masoom, K (2008), Financial Management, John Wiley and Sons Professional Publications, pp.11-68 Read More