Investment: Portfolio Performance - Assignment Example

The paper "Investment: Portfolio Performance" is an outstanding example of an assignment on finance and accounting. Stock A has a mean of 0.39 which is the expected return of investing in a single stock held by an investor. On the other hand, the standard deviation of stock A is 0.25 which implies that the risk of investing in stock A is 0.25. If the investors invest in stock B his expected return is 0.26 and the risk of investing in this stock is 0.28

If the investor decides to invest in stock C his expected return will be 0.28 and the risk or the standard deviation will be 0.23 which is a risk of a stand-alone portfolio as compared to the diversification of his portfolio which has an effect of reducing the risk of a stock. Investing in stock D on the other hand yield a mean or expected return of 0.05 and a standard deviation of 0.37. This implies that stock D has a low expected return at high risk.

Stock E has a mean of 0.25 and a standard deviation of 0.32. This implies that the stock will yield a low mean at a given high risk. Similarly, stock F yields a mean of 0.16 and a standard deviation of 0.15. The investor will prefer stock A which yields the highest mean with the given level of risk. Investing in a portfolio has the advantage of maximizing returns as well as minimizing the risk. (Risk diversification)

It is worth noting that the standard deviation depends on the correlation coefficient if the proportion of investment is fixed. If the correlation is 1, it implies that two stocks are perfectly positively correlated and therefore their outcomes move in the same direction. A correlation of -1 implies that two stocks are negatively correlated and their outcomes are inversely related. That is, they move in the opposite direction simultaneously. For example, from the correlation matrix, the correlation between stock A and stock C is 0.30 which means that the two stocks are positively correlated, similarly, the correlation between stock F and stock D is -0.01 which means that the two stocks are negatively correlated. If stocks are perfectly negatively correlated then investing in them in a portfolio greatly minimizes their risk.

Efficient portfolios are defined as those portfolios which yield the highest expected return at any given level of risk or the lowest level of risk for any expected return. Investors, therefore, tend to ensure that they hold those stocks which will minimize their risks. From the table of weights for optimal risky portfolio, the investor should invest in stock A which yields the highest expected return at a given risk.

Beta is defined as the measure of volatility or sensitivity of a portfolio in comparison to the market as a whole. A beta of 1 implies that the stock is less volatile than the market. On the other hand, a beta of more than 1 indicates that the stock price is more volatile than the market. The betas of the six stocks are less than 1 and this means that they are less volatile or sensitive than the market.