Portfolio Management-Efficient Portfolio and Investment Fund - Essay Example

Portfolio Management-Efficient Portfolio and Investment Fund al affiliation: Efficient Portfolio Below is an efficient portfolio constructed using mean variance optimization as a quantitative tool that enables making asset allocation by considering trade –off between risk and return. Correlation Matrix Covariance Matrix Optimal Completed Risky portfolio (unrestricted) Results Risk-free Asset Optimal Risky portfolio Overall Return 3.01 14.645 11.46 Risk 0 18.747 11.82 Optimal position 0.3 0.4373 Optimal completed Risky portfolio (restricted) Risk-free Asset Optimal Risky portfolio Overall Return 3.01 13.705 8.56 Risk 0 15.547 9.282 Optimal position 0.28 0.4973 Investment Fund Rebalancing or Asset Allocation Asset Class Target Minimum Maximum Credit/Intermediate Government 40% 35% 45% Small- cap value equity 6% 3% 9% Emerging market equity 5% 2% 8% Total US equity 30% 25% 35% Investment policies Long term investments are diverse to minimize the chances of potential loses unless it is determined by the concerned parties such as the finance committee. The long term portfolio purpose could be served effectively with no diversification due to certain special situations. Utilization of funds is in a productive manner. In this case short term funds should provide return, liquidity as well as safety (Aggarwal and Wysocki 2005). Investment manager are required to make an effort of preserving capital and they should keep in mind that there may be losses in individual securities (Carmichael and Pomerleano 2002). The investment managers are required to stick to investment management styles which are their responsibility (Catalan and Musalem 2000). Investment Fund Objectives The major objective of investment fund is to offer a current income that is high enough through investing in securities with fixed income. The investment fund aims at capital appreciation but on condition that it is in line with the core investment objective. The limitations and objectives of the investment fund which are at a low level in investment restrictions are considered to be key policies which could not be altered without being approved by the holder’s outstanding majority shares (Gompers and Metrick 2001). For the needs to be met long term investment strategy is required to put more emphasis on total return; these include interest income, dividend and aggregate return as a result of capital appreciation (Aitken et al. 2007). Asset allocation strategies In terms of money investment, there is consideration of long term financial goals as well as risk tolerance (Carmichael and Pomerleano 2002).The strategies to be considered in this case include; asset allocation across key asset classes that include cash, bond and stocks. This enables appropriate handling of optimal returns for the risks to be undertaken (Harvey et al. 2003). Asset class diversification which gives an opportunity of various investments styles like value stock and growth as well as market sectors like corporate bonds and government (Scherer 2002). Portfolio allocation could be shifted by market activity and rebalancing could help in maintaining the allocation of interest (Scherer 2002). Benchmarking This is considered to be a tool for investment professionals and investors and it is used in evaluating the investment manager results (Markowitz 1991). The process of benchmarking is known to be straight forward and it is very easy to match any investment to a standard of required benchmark like (Bernstein and Wilkinson 1997). The action of the manager could be obscured by common methods of determining the relevant benchmark (Markowitz 1991). This is considered to be the only appropriate way of selecting a benchmark that is relevant as well as proceed accordingly. It is pertinent to note that when benchmarks (Markowitz 1991). Constraints High interest rates could lead to consideration of alternatives to traditional bond funds that include fixed income that is nontraditional or unconstrained. Funds of such kind are free from constrains emerging from benchmark that gives an opportunity in terms of global markets as well as sectors. Furthermore, derivatives are actively transacted than the traditional core-bond. The size of fund could influence the way managers transact in credit market as well as in global fixed income. In this case, large funds could gain access through derivatives contracts. Rationale behind portfolio construction Constructed effective portfolio is very critical for the success of long term investment. Holding assets with expected returns that is high are seen not to correlate with each other and are known to be the major elements for the returns as well as risk management of the portfolio. Diversification is also considered to be a key factor and it is measured by the level of holdings correlation in a portfolio Characteristics of the portfolio This is a moderate portfolio since it is relevant for an investor who has a risk tolerance that is moderately high as well as having a time horizon which is longer than five years. Moderate investors tend to accept moderate market volatility periods. The portfolio tends to provide income as well as capital appreciation in 3 key areas that include cash, bonds and stocks (Carmichael and Pomerleano 2002). The portfolio seems to hold huge positions in stock when compared with conservative allocation portfolio. In this case, such kind of portfolio usually has 50 to 70 percent assets in equities and the extra in cash as well as fixed income (Carmichael and Pomerleano 2002). Appendix: Investment Portfolio YEAR GOOG FORD BAC YHOO AAPL TWTR 2014 7.6% 14.7% 447.5% 2.2% (2.5%) 32.6% 2013 111.5% 57.2% 9.4% 104.7% (7.7%) 217.1% 2012 (39.3%) (52.0%) (32.8%) (59.4%) 53.7% (75.2%) 2011 28.8% 24.5% 5.9% 28.8% (0.1%) (18.3%) 2010 17.4% (1.5%) 10.8% (4.8%) 29.3% (5.0%) 2009 (10.6%) 31.8% 2.5% 67.0% (11.8%) 2.6% 2008 59.1% 5.0% 24.6% 12.9% 32.3% (40.1%) 2005 158.1% 80.9% 86.5% 215.1% 43.5% 151.4% ANNUAL RETURN(AVERAGE 41.6% 20.1% 69.3% 45.8% 17.1% 33.1% Std Dev 61.2% 37.3% 146.3% 78.6% 23.8% 93.5% CORRELATION MATRIX   GOOG FORD BAC YHOO AAPL TWTR GOOG 1.0000 FORD 0.8357 1.0000 BAC 0.7284 0.7304 1.0000 YHOO 0.8727 0.9371 0.7274 1.0000 AAPL 0.0598 (0.3921) 0.0434 (0.0968) 1.0000 TWTR 0.8155 0.8299 0.5234 0.7946 (0.2941) 1.0000 FB 0.5725 0.6371 0.7796 0.6661 0.0184 0.6635 MSFT 0.6137 0.6483 0.9421 0.5663 (0.0827) 0.4882 SIRI 0.4409 0.5695 0.7488 0.3698 (0.4099) 0.4400 PFE 0.6607 0.8702 0.5515 0.8533 (0.4202) 0.8670 CORRELATION MATRIX   GOOG FORD BAC YHOO AAPL TWTR GOOG 0.3742 0.1911 (0.0231) 0.4199 0.0093 0.4665 FORD 0.1911 0.1394 0.0628 0.2758 (0.0344) 0.2897 BAC (0.0231) 0.0628 2.1406 (0.0284) (0.0948) 0.1585 YHOO 0.4199 0.2758 (0.0284) 0.6185 (0.0178) 0.5855 AAPL 0.0093 (0.0344) (0.0948) (0.0178) 0.0568 (0.0650) TWTR 0.4665 0.2897 0.1585 0.5855 (0.0650) 0.8745 FB 0.1214 0.0824 0.2411 0.1830 0.0011 0.2156 MSFT 0.1766 0.1136 0.4770 0.2118 (0.0101) 0.2151 SIRI 0.0917 0.0722 0.3577 0.1006 (0.0341) 0.1405 PFE 0.4216 0.3391 0.2481 0.7019 (0.1044) 0.8468 STANDARD DEVIATION OF PORTFOLIO MINIMIZED RISK Equal- Min Long 0% to 25% 5% to 15% Weighted Var Only Weights Weights Stock Portfolio Stock Portfolio Portfolio Portfolio Portfolio GOOG 10.00% ARO (43.08%) 0.00% 0.00% 5.00% FORD 10.00% ARW 87.99% 16.98% 25.00% 15.00% BAC 10.00% ASI 7.72% 0.00% 0.00% 15.00% YHOO 10.00% GLW (14.02%) 0.00% 0.00% 5.00% AAPL 10.00% GTIV 70.77% 59.67% 25.00% 15.00% TWTR 10.00% KLIC 18.61% 0.00% 0.00% 5.00% FB 10.00% MKSI (28.90%) 0.00% 25.00% 15.00% MSFT 10.00% OME 1.61% 0.00% 0.00% 5.00% SIRI 10.00% PL 5.13% 23.35% 25.00% 15.00% PFE 10.00% SNDK (5.83%) 0.00% 0.00% 5.00% WEIGHTS(SUM) 100.00% Sum of Weights 100.00% 100.00% 100.00% 100.00% EXPECTED RETURN 32.71% Expected Return 11.20% 15.83% 14.29% 29.00% STANDARD DEVIATION OF PORTFOLIO 47.36% Std Dev 9.70% 14.12% 21.40% 41.21% References Harvey, Campbell R., John C. Liechty, Merrill W. Liechty, and Peter Müller. (2003). “Portfolio Selection with Higher Moments.” Working Paper, October 16. Scherer, Bernd. (2002). “Portfolio Resampling: Review and Critique.” Financial Analysts Journal, November/December , 98-109. Markowitz, Harry M., Portfolio Selection, second edition, Blackwell (1991). Bernstein, William J. and Wilkinson, David, (1997).Diversification, Rebalancing and the Geometric Mean Frontier, research manuscript AggarwalR, Klapper L and Wysocki P (2005), Portfolio Preferences of Foreign Institutional Investors‖,Journal of Banking and Finance, 29, pp. 2919-2946. 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