A Study on Markowitz Portfolio Theory

A) Calculate the weight of portfolio B, the expected portfolio return, and the portfolio standard

This was a simulation project related to application of different tools of portfolio management. The project was applied by using stocktrak.com platform. This website provides the students and teachers with a real time simulation platform for learning the portfolio investment. A specific allocated amount was used in this simulation project for portfolio investment. A portfolio was created of different securities like stocks, bonds and currencies. These bonds and securities were from different sectors of economy like technology industry, financial industry, consumer goods industry, services industry, health industry, industrial goods industry, utilities industry, and basic materials industry. The top performing stocks in this simulation project were Bank of America Corporation, Hersha Hospitality trust, Deans Food Company, Loews Corporation, and Pepsi Co Inc. The study also found that the percentage return on portfolio remained above the return realized on Dow Jones ETF during the timeline of the project.

With Reference to this statement, describe, discuss and illustrate the principles of portfolio theory. Your essay should include coverage of the Markowitz Efficient Frontier and the Capital Market Line.

(b) The mean excess return, standard deviation, and portfolio weights for the optimum (maximum Sharpe ratio) portfolio.

Harry Markowitz 1991, developed a theory of “Portfolio choice”, that allows the investors to examine the risk as per the expected returns. In modern World, this theory is known as Modern portfolio theory (MPT). It attempts to attain the best portfolio expected return for a predefined portfolio risk, or to minimise the risk for the predefined expected returns, by a careful choice of assets. Though it’s a widely used theory, still has been challenged widely. The critics question the feasibility of theory as a strategy for

For the three consecutive days of teaching reading and writing, the student will complete a mini portfolio to prepare for student teaching portfolio expectations. For this assignment you will be required to:

2. What would have been Martin’s return for years 2000, 2001, and 2002 if his portfolio had remained with its initial holdings?

(1) Calculate the expected return (rp), the standard deviation (p), and the coefficient of variation (CVp) for this portfolio and fill in the appropriate blanks in the table.

* Compute the real rates of return on each of the investments in your portfolio based on

“Sit down, let’s talk. A couple weeks ago, you came to me asking for advice regarding your stock portfolio. I didn’t help you too much then, but I will now. I don’t recommend investing your money at this age, but to do so after receiving the right education,” Mr. Forgeron advised to me as I shifted uncomfortably in the chair. This was not at all what I was expecting when he called me up to his desk after winning the monthly game of Hangman in our seventh grade Algebra class, but I listened intently.

We assumed that our clients are a married couple, who are 55 years old, and based on that we calculated their total income, costs, as well as the expected return of the portfolio based on their retirement demography. According to the US Census Bureau, Americans now have an average retirement age of 62.9, and an average death age of 78.7. Thus, our clients have to work for 7.9 years before they retire, and they have 15.8 years of their retired lives. We assumed that our clients have the average savings for 55-year-old couple of $117,000 and annual salary of $60,580, and we also presume their incomes do not increase anymore. Considering pension and social security income, the couple will have a total income of $1,392,281.20 till they pass away.

According to the CAPM model:R_i=α+βR_m+ε, α represent the abnormal return gained by the portfolio. If the market is efficiency, the α has to be zero.

During the interviews, it was understood that Portfolio Theory is difficult to apply to loaning administration. A bank is required to have a flexible credit evaluating process to capture the individuality of each loan. These differences depend on the size of the loan and the different clients’ risks. This makes it difficult to apply loan portfolio diversification compared to a portfolio of bonds or stocks. Nevertheless, more than the fixed principles banks seem to follow the intuition behind it not to expose themselves more than a limit.

During 1952, Markowitz came out with a theory based on diversified investment is able to construct the risk-averse investors. He diversified investment portfolio theory and efficiency of the priory rigorous mathematical tools as a means to demonstrate risk-averse investors in a number of risky assets in construct the optimal portfolio methods.

The remaining alternatives for this client are to invest in U.S. Rubber, a market portfolio, and a 2-stock portfolio of High Tech and Collections. The expected rates of return are 9.8% in U.S. Rubber, 10.5% in a market portfolio, and 6.7% in the 2-stock portfolio.