Ensuring Maximum Returns from Investments Assets - Assignment Example

REPORT INVESTMENT FINA302 13805 OF THE PROJECT: FORMATION OF INVESTMENT PORTFOLIO TOTAL 20 MARKS SUBMISSION BY name & id: xx xxx xxx xxx SUPERVISION BY DR. ARUNA DHADE Abstract This project is done by four members, including xx, xx, xx, and xx. The project is aimed at helping the group members put in to practice what they have learned in class, as well as sharing their diverse experiences. In addition, the project is key in helping the group members experience a practical view of what really happens in the portfolio investment, including portfolio selection, asset allocation, and risk-return decisions. Introduction In order to ensure maximum returns from investments assets, investors not only consider the financial asset that has possibility of giving maximum returns, but also include in the investment basket of less risky investment assets, with intent of minimizing the investment loss should one asset suffer poor performance (Daniel et al. 1998). As behavioral scientists suggest, most investors tend to be risk averse and taking this into consideration, I carried out proper analysis of the market before deciding on the best class of assets to invest in. This is done by looking at the historical performance of the desired shares to gain a better understanding and hence forecasting of the possible future performance. What an investor needs to do In the course of carrying out an investment in the money and capital markets, an investor should be up to date with the market information as it plays a bigger part in determining the equity price movement. Also, in considering investing in the stock market an investor should carry out thorough study of the companies in which he intends to purchase the stocks by paying much attention to its financials, the management and also its future plans. Further, for an investor to realize his investment goal, they should adopt an investment strategy that is consistent with his risk tolerance attitude failure to which a mismatch could otherwise lead to maximum loses. Portfolio In investment, the word portfolio is used to denote a collection of financial assets, such as stocks, cash or bonds. In our analysis, we chose the following classes of portfolio: 4 stocks Commodity (Gold) Bonds 1. Ooredoo 2. QNB 3. Doha insurance 4. Vodafone Qatar (VFQS) 1. Randgold Resources Limited (GOLD) 1. P ONTARIO B2024 The following set of measurements was conducted to assess the performance of different classes of portfolio. We used these tests to perform Treynor Measure, which helped us decide on the best portfolio select the best portfolio among the six options, which has the lowest risk Expected Returns for each security Variance for each security Standard Deviation of each security Standard Deviation of each portfolio Covariance for each group Coefficient Correlation for each group The calculations used The best portfolio is one that balance returns with risk. Treynor Measure can be used to measure the success of the successful portfolios, by reviewing both risk and return together. To estimate risk, Treynor Measure takes into consideration the beta coefficient, which measures the volatility of the portfolio to the market (Hübner 415). The following formula is used to calculate Treynor Measure: Treynor Measure = [Portfolio return – risk free rate]/beta In this case, beta is represented by the standard deviation; while the risk free rate will be assume to be 0.05. Based on these assumptions, the return, risk free rate, and beta for respective portfolio is as follows: Portfolio Expected returns Beta/stdev Risk Free rate P ONTARIO B2024 6.35% 1.14 0.05 Ooredoo 6.18% 1.36 0.05 QNB 2.16% 4.06 0.05 Randgold Resources Limited (GOLD) -6.40% 4.74 0.05 Doha Insurance 0.16% 0.315 0.05 Vodafone Qatar (VFQS) 20.63% 1.04 0.05 Now, Treynor Measure can be calculated as follows: P ONTARIO B2024 = [0.0635 – 0.05]/1.14 = 0.0118 Ooredoo = [0.0618 -0.05]/1.36 = 0.0087 QNB = [0.0216 – 0.05]/4.06 = -0.007 Doha Insurance =[0.0016-0.05]/0.315 = -0.154 Vodafone Qatar (VFQS) = [0.206-0.05]/1.04 = 0.15 Randgold Resources Limited (GOLD) = -0.064 – 0.05]/4.74 = -0.024 Since the best portfolio is the one with the highest Treynor Measure, I conclude that P Vodafone Qatar (VFQS) is the best portfolio. Other calculations used to assess risk 1. Covariance Covariance shows how two dependent portfolio move together. Usually, a group of assets which are not perfectly correlated provides the best combination of investment. Putting this factor into consideration, QNB and Oordoo is the best group because their correlation if very far from 1. This, also, gives the investor a more diversified portfolio, which is less risky. 2. Coefficient of correlation The risk of a portfolio is low when assets move in the same direction and at the same rate. In this regards, Doha insurance and Vodafone Qatar (VFQS) makes the best pair, because they have appositive coefficient of 0. 2372. Conclusion Investors are advised to apply financial assets diversification to hedge against potential business risk and other common market risk. This principle assumes that all the investors are risk averse and therefore requires them to diversify their investments baskets in such a way that poor performance from one of the financial assets does not result into total loss in the overall investment. For this investment, the investor tries to diversify by holding both riskier assets (equities) and less risky assets (cash) to hedge against future potential risks. This analysis has applied different measures in order to find out the best portfolio that minimizes the effects on the desired returns upon happening of risks. Works Cited Daniel, K et al. “Investor psychology and security market under- and overreactions,” Journal of Finance, 53.16 (1998): 1839-1886. Hübner, Georges. "The Generalized Treynor Ratio." Review of Finance 9.3 (2005): 415. ProQuest. Web. 5 Jan. 2014. Read More