Essay On Portfolio Performance

Portfolio management is an important factor that determines the performance of the portfolio. To perform well in the portfolio, it is not only essential to develop personal investment strategies, but analyzing current financial trend is also vital. Stock Trak is an online portfolio simulation that allows students to try out different investment strategies, and also get a hand on experience in what the real market trading conditions are. By managing the portfolio, I have acquired some new knowledge of investment strategies and also become more familiar with the current market by following closely to the financial headlines.

This paper will assess my ability to maximize my personal return on investment with an allocation of $1,000,000. The overall goal of this exercise is to obtain the highest return possible within the next 12 months. I am limited to the following asset classes for allocation of all investments:

Advisors and investors would do well to pay as much attention to the expected volatility of any portfolio or investment as they do to anticipated returns. Moreover, all things being equal, a new investment should only be added to a portfolio when it either reduces the expected risk for a targeted level of returns, or when it boosts expected portfolio returns without adding additional risk, as measured by the expected standard deviation of those returns. Lesson 2: Don’t assume bonds or international stocks offer adequate portfolio diversification. As the world’s financial markets become more closely correlated, bonds and foreign stocks may not provide adequate portfolio diversification. Instead, advisors may want to recommend that suitable investors add modest exposure to nontraditional investments such as hedge funds, private equity and real assets. Such exposure may bolster portfolio returns, while reducing overall risk, depending on how it is structured. Lesson 3: Be disciplined in adhering to asset allocation targets. The long-term benefits of portfolio diversification will only be realized if investors are disciplined in adhering to asset allocation guidelines. For this reason, it is recommended that advisors regularly revisit portfolio allocations and rebalance

“The Benefits of diversification are clear. Portfolio theory has played a crucial role in explaining the relationship between risk and return where more than one investment is held. It also enables us to identify optimal and efficient portfolios.”

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

Rate of return on total assets: This ratio compares the operating income against the total net assets. This can show how effective the company is in utilizing its assets prior to paying taxes. To determine this ratio take the net income and add the interest expense and divide those by the average total assets. In year 11 that rate was 12.30% and year 12 only showed a 2.48% increase to 14.78%. This rate has stayed consistent between the last 2 years and is trending in the right direction even if it is slow. I would consider this strength at this time because it is below the upper quartile of 17.2 but above the median quartile and lower quartiles of 12.3 and 8.6.

Nevertheless, such reduction in diversification would make risk increase. The complete table “Risk and returns of portfolios” provides the different changes. 5. The portfolio between TECO – S&P 500 has an expected return of 14.3% and a standard deviation of 14.1%. In this portfolio the correlation is greater than the one in the other portfolio because the risk-reducing effect is much lower than the one in the portfolio TECO – Gold Hill.

For standard deviation, we use it to measure the stand-alone risk of certain asset, which include both the systematic risk and unsystematic risk. However, when combining the assets into the portfolio, due to the correlation among the assets, certain amount of unsystematic risk could be diversified. Suppose all of the unsystematic risks could be diversified after the combination of the assets, we could use ß to measure each variable’s risk. So we have the ß of Vanguard for 0.98, the ß for Reynolds for 0.71 and the

When we measure risk per unit of return, Collections, with its low expected return, becomes the most risky stock. The CV is a better measure of an asset’s stand-alone risk than because CV considers both the expected value and the dispersion of a distribution—a security with a low expected return and a low standard deviation could have a higher chance of a loss than one with a high but a high .

Diversity investment among stock markets, bounds and nationally and internationally is the best me method of maintaining the risk of investment and expanding its growth. The fourth importance is the cost of single investment; the less money an investor pay; the more financial resources will have to take advantage on future investment opportunities that expand the return. Becker’s final advice of investment success was for investors to slick with their plan. “Lethargy bordering on sloth remains the cornerstone of our investment style”, Warren Buffett. Many investors get influenced by what goes around them and the media to end their investment prematurely or get involved in risky commitment outside of their goals.

“…anointing winners and losers on the basis of 12 months’ worth of performance is silly in the context of portfolios that are being managed with incredibly long time horizons.” — David F. Swensen, Chief Investment Officer, Yale University1

The success of the model is attributed to Yale’s ability to combine both quantitative analysis (mean-variance analysis) with market judgments to structure its portfolio. In addition, Yale also uses statistical analysis to actively test their models with factors affecting the market, therefore understanding the sensitivity of their portfolio in response to various market changes. Yale also follows and forecasts the cash flow of private equity and real assets in its portfolio to decide the need for hedging.

To reduce a firm’s specific risk or residual risk a portfolio should have negative covariance or rather it should have no variance at all, for large portfolios however calculating variance requires greater and sophisticated computing power. As such, Index models greatly decrease the computations needed to calculate the optimum portfolio. The use of such Index models also eliminates illogical or rather absurd results. The Single Index model (SIM) and the Capital Asset Pricing Model (CAPM) are such models used to calculate the optimum portfolio.

From September 3rd, 2015 to October 28th, 2015, our group was given the opportunity to manage an investment portfolio, with the goal of maximizing the value of the portfolio through acquiring, holding, and selling stock. The beginning cash balance of the portfolio was $100,000, and our group had the ability to make up to 500 trades. During this time period, our group made 20 stock purchases and sold stock twice. At the close of business on October 28, 2015, the value of our group’s portfolio increased from $100,000 to $106,785.33, yielding a return of  6.78% (((106785.33/100,000)-1) x 100)). In comparison to the S&P 500 returned at 7.16% and the Dow Jones having a return of 8.65% (Yahoo).

As indicated by the case study S&P 500 index was use as a measure of the total return for the stock market. Our standard deviation of the total return was used as a one measure of the risk of an individual stock. Also betas for individual stocks are determined by simple linear regression. The variables were: total return for the stock as the dependent variable and independent variable is the total return for the stock. Since the descriptive statistics were a lot, only the necessary data was selected (below table.)