International Financial Markets - Coursework Example

International Financial Markets Portfolio Management Introduction 我选的公司都是纳斯达克100指数的公司 A portfolio is a collection of financial assets like stock, bond, and cash equivalents. The portfolio should be wisely constructed to eliminate or minimize the risk associated with investment (Frisch, n.d., pg 30). It is advisable to select different financial assets to increase the possibility of high return. However, selecting one financial asset for investment should be spread across different sectors. Five companies have been chosen for this paper namely; Apple Inclusive, McDonalds Corporation, Nike Inclusive, Coca-Cola Company, and Inovio Pharmaceuticals Inclusive. 公司名字换了 The companies operate in different industry, and this is a brilliant idea because an economic crisis in a given sector will only affect the businesses operating in that industry. For instance, McDonalds Corporation公司换了例子也需要换operates in the food industry while Inovio Pharmaceuticals Inclusive operates in the medical sector. All the firms named above are multi-national thus they have large customer-base, hence are capable to influence stock prices of their competitors. Financial position of the firms is stable. Using the debt ratio, the entire firms have low debt ratio according to (Warren, & Fess, 1996, pg 43), this signifies that a large percentage of the firm’s asset is financed by the stakeholders. Divided refers to the portion of profit a firm pays it shareholders in accordance with the dividend policy. Inovio pharmaceuticals has the highest mean return this therefore, means the dividend payout rate is also higher. Investors do not invest in companies that have high dividend payout rather they consider future growth of the firm (Silva & Goergen, 2004, pg 51). Therefore, it cannot be a shock when an investor decides to invest in Apple’s shares and avoiding Inovio pharmaceuticals. Mean return of the stocks refers to the expected or average return from each stock. Calculating the mean return of a stock is essential in determining shares which are profitable. The stability of a firm is spotted on how the shares perform. The mean return should be higher than the rest for it be profitable. In the calculation, as shown in the Ms Excel, the mean return from Inovio pharmaceuticals is higher than the other stocks having a mean of 0.991%类似这样的数值都需要改. This statistical measure will lure investors who are after a firm that makes a good return. It is followed by Coca-Cola stock having a mean of 0.027%. The difference is wide thus giving Inovio pharmaceuticals a favourable statistical measure. Standard deviation identifies the riskiness of investing in different shares. The higher the standard deviation, the riskier it is to invest in a particular firm’s stocks. Standard deviation is got from the square root of the variance. Variance calculates how disperse the stock prices are far from the mean. The wider the variance, the riskier is to invest the given stocks. According to (Reilly, 1985, pg 15), investors want a firm which is stable, and reliable, in the sense that the returns from the shares are consistent, and predictability can be done. However for stocks that have high standard deviation are hard to be predicted and a constant returns. In the excel sheet, it can be noted that Inovio pharmaceuticals has the highest variance thus high standard deviation. It has a 2.45% and 15.65% variance and standard deviation. The variance level is high this means that investing in the stocks of Inovio pharmaceuticals is risky since the returns are not stable. The stability of stock prices is reflected by a low standard deviation measure. McDonalds Corporation has the lowest standard deviation of 0.843% than the other stocks. Investing in McDonalds stocks is safer, and the returns are stable and predictable. Investors prefer the shares that are predictable, so that they can make financial plans in future investment. A point to note is that the higher the return the riskier an investment is and vice versa (Warren, & Fess, 1996, pg 71). The statement can be manifested in the stock prices calculated in the Ms Excel sheet. Inovio Pharmaceuticals has the highest return, but it is risky investing in its stocks. McDonalds, on the other hand, has a relative low mean return of 0.010%, but less risky. Most investors will prefer these stocks as opposed to others. Correlation is a statistical measure that indicates the degree at which two set of variable are related in terms of direction movement (Choey, & Weigend, 1997, pg 83). A correlation of 1 indicates a positive correlation, 0 indicates no correlation while a -1 indicates a negative correlation. Positive correlation means that both variables move in the same directions in case of increase, and with the same amount. A negative figure means the variables move in opposite directions with the relative amount increased or decreased. In the excel sheet the correlation between Apple Inclusive, and Inovio Pharmaceuticals is the only one having a negative correlation of -0.19. The correlation between Coca-Cola, and McDonalds has the highest correlation figure of 0.4124. Though the correlations are not strong, the impact on stock prices will be noted after several changes in stock prices. Selecting stocks from Apple Inclusive and Inovio pharmaceuticals to invest in is a brilliant idea. According to (Briston, 1970, pg 57), both firms operate in different field/industry, and, therefore, systematic risks can be minimized. In this case, a market crisis in the technological field which Apple operates in will not affect Inovio pharmaceuticals the same case will apply if a crisis is experienced in the pharmaceutical field. Using the correlation in the excel sheet, the coefficient for Apple Inclusive and Inovio pharmaceuticals is -0.19. The coefficient being negative means that an increase in the stock prices for Inovio will lower that of Apple. Bearing in mind the return from Inovio are higher than any other stocks. In case the stock prices for Inovio drops, there is a chance in the increase of Apple stock prices. These two stocks will maximize the possible returns and enhance the diversification in the investments. 一般来说 covariance=correlation*两只股票各自的standard deviation，所以我之所以选2公司跟4公司是因为它们各自的standard deviation最小并且它们的covariance 也比较小 An efficient frontier provides insight on what level of risk an investor can invest and have a good return. Avoiding risks, in general, will only be limiting the capability of an investment (“Project portfolio management a view for the management trenches”, 2009, pg 85). Portfolio that lies below the efficient frontier upward slope is less risky, but with less return. The client requires a return of twenty percent, from the excel calculation a return of 20.6%. The portfolio should have seventy-eight percent with stocks from Apple Inclusive and twenty-two percent from Inovio Pharmaceuticals. The riskiness of the portfolio is minimized to 0.024%. The efficient frontier assists in the decision-making process for a portfolio investment. The client can purchase six hundred and fifty-two stocks from Apple Inclusive which will be seventy-eight total value of the portfolio. Purchasing an additional three thousand three hundred and forty-one shares from Inovio pharmaceuticals will be twenty-two percent. The combination or mix will diversify the portfolio reducing the risk and maximizing the possible returns. It has been argued that diversifying portfolio to eliminate risks is impossible and this scenario proves it. Risks in portfolio can only be minimized. According to (Foster, 1974, pg 54), investing in whatever field there must be risks however, how one does the calculation and analyzes the possibility and impact of a risk are what matters. Analysis of the return of the portfolio A has shown in the excel shows that the combination of the two stocks i.e. Inovio pharmaceuticals and Apple Inclusive is a good choice. The portfolio has the capability of giving a return of 48.8% and a risk of 0.025%. The level of return and risk are appealing for any investor, since having an investment with almost 50% return and a low risk level attracts investors. curve chart needs here Sharpe ratio is a measure to adjust risk, William Sharpe developed it, and he used the excess return and standard deviation to come up with the ratio. Sharpe ratio for portfolio A is 0.83. 不对，具体的数值我已经算出来，在Excel Portfolio A 中The ratio is not bad for an investor who seeks to gain a good return as proven by the portfolio level of return. The higher the Sharpe ratio is better for an investment. It simply means an investment can gain a good return with less risk as compared to when the ratio is low. Using this ratio simplify the calculations behind getting the returns with risks attached to it. One is able to calculate the most probable return from the investment. Risk and returned attached to an investment might not be understood easily using the other financial analysis procedures as compared to Sharpe ratio (Reilly, 1985, pg 173). A risk-free asset is an asset which has a guaranteed rate of return. Treasury bonds are good examples of a risk-free asset. Risk-averse investors will always want to reduce the risk level attached to the investment. They will forego the chances of high returns, but have high risk levels. Adding a risk-free asset to a given risky portfolio will be favourable to a risk-averse investor (Stoll, n.d., pg 74). Portfolio B will have to be reduced since the amount to be invested is fixed. For instance, 10% of the portfolio will be reduced to include a 10% of a risk-free asset. The portfolio has a mean expected return of 48.8% and standard deviation of 0.0252%. A risk free asset has an expected return of 4%. Capital market line is simply a line that is used to estimate the most efficient rate of return of a portfolio depending on the risk-free rate and the level of standard deviation of a portfolio. According to Nielsen, (1998, pg 74), capital market line (CML) can be regarded as robust compared to the efficient frontier since it considers the level of risk-free asset in the portfolio. In this portfolio of the client both systematic and unsystematic risks need to be considered when estimate the return of a portfolio. Systematic risks refer to those risks that can be diversified while unsystematic are inherent to the assets in the portfolio and cannot be eliminated by diversification. The expected return of the portfolio can be estimated using the capital market line. Since the capital market line takes into consideration the risk-free rate of a given asset in the portfolio, it is expected the expected the return will decrease. This because the chances of getting return from portfolio B is enhanced by a reduction in the level of risk (standard deviation). The mean return for portfolio B is currently 48.8%, inclusion of an asset with risk-rate of 4% will reduce the expected return by a margin of 4 * 2 = 8%. The estimate of the portfolio return will be 36.8%. The risk level of the portfolio will definitely reduce. Using the percentage decrease of expected return, the standard deviation for the portfolio can be calculated. The new risk level for the portfolio is 0.0212% a decrease of 0.004%. For a risk-averse client, a decrease in risk level motivates him in investing more in different assets, since the returns seem to be guaranteed. 这段没有用处了，你不用让他改，等他改完我再发你一小段，你放在这个位置 文章没有说你的Portfolio A 能不能打败市场！也就是Section 3 最后一问，你让他加几句。写这部的要根据Portfolio A 来写，根据我给你建立的A，年收益可以打败富士100和标普500，但是风险要比它们大。不需要一定说是非打败市场。 you didn’t answer section3 Q3. Conclusion Having the best portfolio mix to guarantee a better return might be tricky, but one just need to do an insight evaluation. It might appear to be tedious, but at the end of it, it turns to be beneficial. Investors always want better return, and will take calculated risks. Risks in all form of investment are inevitable, one just need to know the level of risk he/she can handle. Stocks have proven to be profitable especially when a reputable firm issues new stocks (Cooper, & Edgett, 1998, pg 164). Therefore, investing in different stocks to form a portfolio is recommended at this time and age. An investor whether risk-averse or risk-taker should always determine the level of risk that can be tolerated or else the expectation from the investment will not be met. Meeting the client’s expectation can be hectic when mixing the portfolio, but use of financial theory can lessen the complexity. According to (Reilly, 1985, pg 56) wide knowledge of the current happening in stock market for financial consultant is a mandatory for successful portfolio mix. For clients, who are risk-averse the best portfolio for him should be inclusive of risk-free asset. References Briston, R. 1970. The Stock Exchange and investment analysis,. London: Allen & Unwin. Choey, M., & Weigend, A. 1997. Nonlinear trading models through Sharpe Ratio maximization. New York, NY: New York University, Leonard N. Stern School of Business. Cooper, R., & Edgett, S. 1998. Portfolio management for new products. Reading, Mass.: Addison-Wesley. Foster, E. 1974. Common stock investment. Lexington, Mass.: Lexington Books. Frisch, R. n.d.. Investment starting vs. investment sinking. Economics of Planning, 219-231. Nielsen, L. 1998. Portfolio selection with randomly time-varying first and second moments: The role of the instantaneous capital market line. Fontainebleau, France: INSEAD. Project portfolio management a view for the management trenches. 2009. Hoboken, N.J.: Wiley. Reilly, F. 1985. Investment analysis and portfolio management (2nd ed.). Chicago: Dryden Press. Silva, L., & Goergen, M. 2004. Dividend policy and corporate governance. Oxford: Oxford University Press Stoll, H. n.d. Portfolio trading. The Journal of Portfolio Management, 20-24. Warren, C., & Fess, P. 1996. Accounting (18th ed.). Cincinnati, Ohio: South-Western College Pub. Read More