Rationale behind the Investment Decisions of Portfolio - Essay Example

Finance and Accounting Describe the performance track record and rationale behind the investment decisions of your Dummy Portfolio this term, in the style of a Hedge Fund Investor Letter The performance of whole dummy portfolio Metric Chan, Hiu 3M Return 26.01% Annualized Return 3.25% 3M Risk Free Rate 0.02% Weekly Standard Deviation 3.50% Annualized Standard Deviation 25.27% Beta vs. S&P500 0.05 Beta vs. Fund #N/A Fund Return 36.00% S&P500 Return 45.00% Weekly Standard Deviation of S&P500 2.95% Standard Deviation of S&P500 21.24% Jensen 0.24 Treynor 5.20 Sharpe 1.03 M Squared -15.9%     Returns Chan, Hiu 9/29/2014   10/6/2014 1.44% 10/13/2014 3.44% 10/20/2014 6.53% 10/27/2014 1.22% 11/3/2014 1.40% 11/10/2014 2.82% 11/17/2014 1.53% 11/24/2014 2.42% 12/1/2014 7.57% From the above table it can be seen that the return of the dummy portfolio on 10.6.2014 is 1.44%, on 10/13/2014 the return is 3.44%, on 10/20/2014 the return is 6.53%, on 10/27/2014 the return is 1.22%, on 11/3/2014 the return is 1.40%, on 11/10/2014 the return is 2.82%, on 11/17/2014 the return is 1.53%, on 11/24/2014 the return is 2.42% and on 12/1/2014 the return is 7.57%. The 3 months return of the dummy portfolio is 26.01%, annualized return is 3.25%, 3m risk free rate is 0.02%, weekly standard deviation of the dummy portfolio is 3.50%, annualized standard deviation is 25.27%, beta of the portfolio is given as 0.05, and return from the fund is 36%. The return from S&P 500 return is 45%, weekly standard deviation of S&P 500 is 2.95% and total standard deviation of S&P 500 is 21.24%. The performance of stocks which has been bought Here we have bought several stocks such as FTSE100 which has beginning level of 6627 and end level of 6722.67 and it has earned total gain of 1.44%. CAC40 had beginning level of 4244 and end level of 4390.18 and it has earned total gain of 3.44%. DAX had beginning level of 9369 and end level of 9980.85 and it has earned total gain of 6.53%. Dow Jones Industrials had beginning level of 17614 and end level of 17828.24 and it has earned total gain of 1.22%. S&P500 had beginning level of 2039 and ending level of 2067 and it has earned total gain of 1.40%. NASDAQ had beginning level of 4660 and end level of 4791.63 and it has earned total gain of2.82%. Nikkei225 had beginning level of 17197 and end level of 17459.85 and it has earned total gain of 1.53%. Topix had beginning level of 1377 and end level of 1410.34 and it has earned total gain of 2.42%. Shanghai Composite had beginning level of 2494 and end level of 2682.92 and it has earned total gain of 7.57%. CSI300 had beginning level of 2594 and end level of 2808.82 and it has earned total gain of 8.28%. Spot Gold had beginning level of 1165 and end level of 1167.41 and it has earned total gain of 0.21%. USD against Japanese yens had beginning value of 1$= 115.33 yen and the value has increased to 1$=118.68 yen and it has earned total gain of 2.90%. Brent Spot beginning level of 81.01 and end level of 77.75 and it has earned total loss of -4.02%. NY Crude Oil had beginning level of 77.32 and end level of 73.69 and it has earned total loss of -4.69%. The dummy portfolio has also earned negative returns or loss for spot silver, spot platinum, pound against dollar and pound against euro. Thus it can be said that the dummy portfolio has average to good return in the period. Reason of buying the stocks The stocks have been bought as they are performing high in the market. It can be seen that most of the stocks have given higher returns and some of them have earned negative returns in the dummy portfolio. Theories Jensen measure It can be defined as risk adjusted measure to performance of portfolio which states the average return of a portfolio that is more than predicted by the CAPM (Capital Asset Pricing Model) along with the beta of the portfolio and the average market return. By Jensen measure we calculate the alpha of the portfolio. From the above table it can be seen that according to the Jensen measure the portfolio has alpha of 0.24.It indicates that the portfolio has average un-systemic risk from the market. Treynor Measure Treynor measure is a risk adjusted method to calculate the return which is based on systematic risk. It uses beta to measure the volatility of the portfolio. The Treynor Measure of the five funds can be calculated by subtracting the average return of the risk free rate from the average portfolio return and dividing that by the beta of the portfolio. Here according to the Treynor measure the return of the portfolio is 5.20 based on systematic risk. The volatility of the portfolio is high. Sharpe Ratio The Sharpe measure of return of the funds over five years and the equally weighted portfolio can be derived by subtracting the rate of risk free securities from the expected return of the portfolio and dividing that by the standard deviation of the portfolio. Here Sharpe measure is 1.03. Risk of the portfolio There can be various risks of the dummy portfolio. As the volatility of the portfolio is high thus if the market goes up and down then the performance of the portfolio will fluctuate very high. Conclusion From the above study it can be seen that the stocks have performed well in the market except of some stocks. The return from the portfolio is 26.01%. According to Jensen measure the portfolio has lower un-systematic risk but the volatility of the portfolio is higher which indicates beta of the portfolio is high. We need to choose lower risky portfolio if we want more stable return. Higher risk may bring high return but loss can also be earned thus it can be said that risk of the portfolio is moderate but as the volatility is high thus if the market goes up then the portfolio will give higher return as compared to the market but if the market goes down then the performance of the portfolio will be decreased more as compared to the market. References Moneyweek.com., 2014.FTSE100.[Online].Available at: http://moneyweek.com/. [Accessed on December 4, 2014]. Read More