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Funds Management and Portfolio Selection - Assignment Example

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The company constituted all ordinary indexes within the stock market of Australia and had huge capitation in the market. The principle objective of the…
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Funds Management and Portfolio Selection
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Funds Management and Portfolio Selection Company Analysis There are ten companies (AMP, XAO, BHP, MTU, ORG, OSH, TLS, WES, WOW, and FMG), which select from Australian Stock Market. The company constituted all ordinary indexes within the stock market of Australia and had huge capitation in the market. The principle objective of the portfolio construction is to maximize utility and minimize systematic risk through diversification of market’s investment.
Figure 1: Regression of the portfolios
The Figure 1 illustrates ten companies’ regression relative to all ordinary indexes. FMG is the company that was heavily influenced by the prevailing market conditions. FMG has regression level of 2.1, which implies that an increase in the market returns by one percent will result to an increase in its overall returns by 2.1%. A positive regression between market and assets, according correlation and data theory, results to assets’ returns moving away those of the market. Consequently, higher regression levels imply greater impacts from the market. The performance of FMG can be associated to its huge weight in all ordinary market, since it is a company associated with mining, processing, as well as transportation of iron ore within the region of Pilbara, Western Australia. Being an iron ore exporting company all over the world, an improvement in the global economy is likely to result increases in the level of consumption, which will affect positively on the prices of FMG and index (Brailsford, Heaney & Chris, 2011).
In addition, this effect is also likely to affect AXA in a similar manner, since it is also one of the companies with notable regression. AXA is the top most wealth management company in Australia and New Zealand with capital management as its integral objective. Its steady improvement is the overall performance in the Australian stock market can be closely associated with the company’s strong capital position. Comparing to other industries, mining industry is the biggest market in Australian, and it takes a huge shape in stock market. This is a reason behind FMG’s higher regress than other companies. Next, these companies set up to ten difference portfolios and the beta decrease with the portfolio extending (Sutton, 2009).
Results from the selection of more stocks into the portfolio
When extra stock is added in each portfolio, the level of Beta reduces from 0.5 to 0.1. As a general measure of stock’s systematic risk, Beta is defined as the quantity of systematic risk present in a certain asset respective of the risky asset. A beta level below 1.0 show a stock with lower amount of systematic risk compared to the market, the reverse is true.
Figure 2: Graphical representation of Beta
The results from the variation in Beta illustrates that when more stock are added to a portfolio, the lower the unsystematic risk exposed. This is evident in various industries or sectors, which are less risky. At first, Beta declines increasingly; however, the trend changes as more stocks are added to the portfolios.
Expected Returns
Figure 3: Expected Return
Figure 3 illustrates a decrease in the systematic risk with expected return dropping to 0.0003346430 from 0.0009922230. It implies that systematic risks can be minimized by adding more stocks, hence diversification. However, the utility reduces rendering investment to be insignificant (Markowitz, 1952).
Brailsford, H, Heaney, R & Chris, B 2011, Investments concepts and application, 4th edn,
Cengage Learning Australia.
Markowitz, H. 1952, “Portfolio Selection”, The Journal of Finance, Vol. 7, No. 1. Mar., 1952,
pp. 77-91, viewed 13 November 2011, 2-1
Sutton, A. 2009, “Investment Portfolio Diversification & Risk”, The Market Oracle, viewed 15
November 2011, Read More
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