PORTFOLIO ANALYSIS

Portfolio Analysis



Portfolio Analysis

Introduction

Portfolio investment is the investment made ??by the purchase of securities or it is the set of financial assets in which the investor invests for future profit. An investment portfolio generally consists of a combination of some instruments that are fixed income and equities, in order to balance the risk. According to researchers and analyst, a good distribution of the investment portfolio spreads the risk across different financial instruments such as: shares, term deposits, cash, currencies, bonds, real estate, mutual funds and others. This is known as diversifying the investment portfolio. The intention f the investor to invest in different securities is due to the diversification of risk.

In this paper, we will the discuss investment in the share, the reason for choosing each investment and need for diversifying the portfolio.

Discussion

Part 1)

In the following portfolio we have selected 10 companies that are listed in London Stock Exchange. I had £100,000 to invest in shares quoted on the London stock exchange.

Amount to be Invested = £100,000

 

 

 

 

 

Sr

Share Names

No of Shares

Price of shares

Weight of share in total investment

Amount

Beta

1

Tesco

200

15.36

0.121212121

3072

1.95

2

Barclays PLC

100

16.05

0.060606061

1605

3.25

3

Vodafone

100

27.45

0.060606061

2745

0.64

4

BP PLC

200

47.84

0.121212121

9568

1.8

5

Mother Care

100

219.25

0.060606061

21925

0.35

6

Yell Group

300

4.5

0.181818182

1350

1.12

7

Zenergy Power

200

8.55

0.121212121

1710

0.68

8

British Assets

100

128.5

0.060606061

12850

1.02

9

Unilever PLC

250

33.05

0.151515152

8262.5

0.71

10

City of London Investment

100

369

0.060606061

36900

1.17

 

Total

1650

 

1

99987.5

The risk free rate (Rf) on U.K. Government Bonds 1-Year is 4.5% (http://www.reuters.com), whereas Return on market (Rm) is 5.2%. With the help of these figures we will calculate the return on each investment in shares and weighted average of your portfolio.

In order to calculate Return on share we will use CAPM formula:

E (Ri) = Rf + ßi (E (Rm) - Rf)

Return on Investment

Return on Portfolio

5.865

0.710909091

6.775

0.410606061

4.948

0.299878788

5.76

0.698181818

4.745

0.287575758

5.284

0.960727273

4.976

0.603151515

5.214

0.316

4.997

0.757121212

5.319

0.322363636

 

5.366515152

Rate of return on a portfolio is calculated:

rp = A1r1 + A2r2 + A3r4 + Atrt

Where A1= weight of share 1 in portfolio, r1 is the return on the share 1in the portfolio  rp equals the total rate of return on the portfolio.

Part 2) Approach to construct your portfolio of Companies

Whenever investors decide to invest in stock exchange, they usually see the historical trend of the company in order to which company is more favorable to them. The most important thing which an investor is how much risk can be avoided and how much return he can get from the invested capital. Hence, the goal is to get high return and low risk. For this purpose, an investor constructs the portfolio in such a way that he can diversity his investment in order to cover up the loss if he made in any sector.

The risk in a portfolio includes systemic risk, also known as un-diversifiable risk. This risk refers to the risk they are exposed to all assets in a market. By contrast, the diversifiable risk is that intrinsic to each individual asset. Diversifiable risk can be decreased by adding assets to the portfolio to mitigate each other, or diversifying the portfolio. However, systemic risk cannot be diminished.

Therefore, a rational investor should not take any risk that is diversifiable, as only non-diversifiable risk is rewarded in the scope of this model. Therefore, the rate of return required for a particular asset, must be linked with the contribution that asset makes to the overall risk of a given ...