Portfolio Management Fin 550 Essay

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.

The lower the risk that is associated with an investment, that investment usually has a potential for lower returns. Conversely, if there are high levels of risk associated with an investment, and in turn a potential for a higher return.

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

It is important to consider those risks, because of the finance principal that states that the greater the risk, the greater the required rate of return of an investment. Though there is no formula that translates a given level of risk of real estate into a proper discount rate, it is accepted that the discount rate associated with the equity portion of a real estate investment should be greater than the rate associated with the debt on the project.

CAPM is a model that describes the relationship between risk and expected return, and the formula itself measures the expected return of the portfolio. Mathematically, when beta is higher, meaning the portfolio has more systematic risk (in comparison to the market portfolio), the formula yields a higher expected return for the portfolio (since it is multiplied by the risk premium and is added to the risk free interest rate). This makes sense because the portfolio needs to

(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.

In order to find the optimal portfolio allocation, the group needs to find the portfolio structured with lowest risk under a given return. This can be achieved by applying Mean-Variance Theory and Markowitz model find the efficient frontier, which yields the most optimal portfolio under given returns. It can be expressed in mathematical terms and solved by quadratic programming. [Appendix A]

7. How might you use this three asset optimal-allocation model to construct and graph an

b. Plot the CAL along with a couple of indifference curves for the investor type identified above. c. Use Excel’s solver to maximize the investor’s utility and confirm that you get a 50% allocation in stocks. 3. You can invest in a risky asset with an expected rate of return of 20% per year and a standard deviation of 40% per year or a risk free asset earning 4% per year or a combination of the two. The borrowing rate is 9% per year. a. What is the range of risk aversion for which a client will neither borrow nor lend, that is, for which the allocation to this risky investment is 100%? b. Draw the Capital Allocation Line. Indicate the points corresponding to (i) 50% in the risk-less asset and 50% in the risky asset; and (ii) -50% in the riskless asset and 150% in the risky asset. c. Compute the expected rate of return and standard deviation for (i) and (ii). d. Suppose you have a target risk level of 50% per year. How would you construct a portfolio of the risky and the riskless asset to attain this target level of risk? What is the

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.

Q2. Provide a full-page plot of the Capital Allocation Line for the case in Q1. Label the axes and locate cash, D. Equity, D. Bonds, and your optimal complete portfolio clearly on the plot. You may draw this plot by hand.

Even though a riskless venture is not possible, Harry Markowitz, a talented economist, brought forth (to our delight) the efficient frontier theory. The purpose of Markowitz theory is simply to find the obtainable enterprises that have the highest expected return for any given risk. This set of enterprises creates an optimal portfolio.

What type of financial investments would you invest in if you were given 10,000 dollars, what made you choose these investments, as well as; how did your choices affect your decision as to tracking these financial investments through the usage of financial strategies and trends. While finding the right pecuniary investment to finance in is never an easy decision, one must first do their research as to what type of financial resources are available on the market to invest in; then apply those financial decisions and strategies to their financial market plan. Let’s begin with what a financial market does, “financial markets perform a vital function: they transfer funds from savers (individuals and organizations willing to defer using some

In their research study, Souder & Myles (2010) identify that risk is chiefly fundamental to investing. Böhringer & Löschel (2008) further add that there is no discussion of returns or performance that is deemed meaningful in the absence of at least some mention of the involved risk. However, the trouble for investors, who have just entered into the marketplace, involves the process of figuring where risk really lies, as well as what the difference between the various levels of risks. Relating to the manner, in which risk is fundamental to investments, a significant number of new