PORTFOLIO MANAGEMENT

Portfolio Management



Portfolio Management

Introduction

In order to achieve the aim and objectives, the research adopted a combination of descriptive and analytical methodology. The study uses daily observations of Dow Jones industrial averages of stocks in 2012. The purpose of this empirical analysis is to identify the various performance and risk implications these instruments have. The methodology used in the study will help in identifying potential upside and downside implications using futures and options in portfolios.

There are two investors in this portfolio assignment. One is risk averse and the other is a risk taker. The Investor A is risk Averse. He has selected three stocks which are Coca-Cola, Nike and IBM. The Other investor has taken the stocks which are Walt Disney, Chevron and JPMorgan. The study involves a structured exploratory form of data analysis in the excel sheet.. Furthermore, it helps the researcher in pursuing leads suggested by background information, patterns perceived and experience with other data analyses. Although primary focus is given to the analysis of different strategies using portfolio analysis, calculation of Sharpe ratio, standard deviation and variances. The research also aims to discuss any relationship between the portfolios using the Dow Jones industrial averages market.

Discussion

Stage 1. Portfolio Construction and Benchmarking

This stage involves the asset allocations of funds where appropriate proportion of funds will be allocated to 3 stocks risk-seeking portfolio. Furthermore, all equity securities are selected from the Dow Jones index. According to (Cooper, Pp.45,, 2001) portfolio construction and benchmarking involves setting up investment objectives, formulation of investment strategy and establishing an appropriate benchmark for risk-return assessment. The investment process begins with a thorough analysis of the investment objectives of the entity whose funds are being invested. These entities can be classified as individual and institutional investors. The objective of an individual investor may be to collect funds for purposes such as purchase of home or to retire at a specified age, or to pay for college tuition for children.

Stage 2.Investment Strategies using Derivatives

This stage involves different strategies with futures contracts and options which investors can use to limit risks in their portfolios and protect themselves from potential losses in their underlying positions. Investors who are holding a portfolio with several shares are not only exposed to general market risks, but also to individual, company specific risks. Furthermore, share prices do not move in unison over the same time, thus some are increasing while others fall due to market related information. (Cooper, Pp.17, 1997) explains that in order to protect a portfolio against major price declines in single shares investors have the possibility to use single stock futures as a form of insurance against price declines. Similarly, an investor A and B are holding a portfolio of $100,000 which is made up of companies in the Dow Jones index. This is a much more cost-effective approach when investors believe that markets will decline in the short-term but increase in the long term since selling their long positions now and buying back later will increase transaction ...