Portfolio Theory and Investment Analysis Term Paper

Portfolio Theory and Investment Analysis - Term Paper Examplewa + wb + wc = 1. E(rp) = waE(ra) + wbE(rb) + wcE(rc ) 0.6(-0.2) + 0.3(0.1) + 0.1(0.04) = -0.086 Hence the system before the 2007 economic crisis would have realised an anticipate return of -8.6% on investment shops. The strategy adopted from 2007 onwards in the light of the crisis would realise E(rp) = waE(ra) + wbE(rb) + wcE(rc ) 0.4(-0.2) + 0.4(0.1) + 0.2 (0.04) = -0.032 The strategy adopted after 2007 would realise an expected return of -3.2% on investment. As a result, the benefit of the strategy adopted from 2007 would be a bring down lose of 5.4% II. Advisability of place more silver in UK equities. With the managers of the livestocks thinking of expend more funds into right in the market, it is important for the managers to analyse the UK equities in a essay-return relationship. Hence when analysing the risk premium of the right with the rest of the asset class, the return differential will be attributed to the rest in the risk associated with equity as opposed to bonds. The equity line will be norm onlyy shakier than the bond line. As diaphanous from the data provided, Wealth invested in equity for the past 20 years has been more volatile than wealthiness invested in bonds (the UK equity having a risk of 16% as compared to 5% for bonds and cash for 0.3% in derivatives). notwithstanding the higher return, the risks were higher as well. The funds managers should care about the riskiness of any investment especially in a volatile market. As a result, they should also be willing to mete out a lower rate of investment return for insurance that their principal will be secure. This is called risk-aversion -- and all things being equal, most investors would prefer less risk to more. At the same time, when analysing the Standard Deviation as a measure of risk, the UK equity returns are riskier and more volatile. Even with the future projections of 8% returns per annum, the projected r isk is projected to be at 18% for UK equity and 19% for overseas equity noteively and at the same time, their correlation is very high at 0.8% between the UK and overseas equity making diversification not an option since it will not create any positive benefits of diversification. Due to the fact that the funds managers will be holding different portfolios, it would be important for them to use other statistical and non statistical data to be able to make informed decisions like the beta in respect to the market, fundamental ratios such as Book to Market Ratio and Earnings Price Ratio. III. Advantage of investing in the funds in international equities rather than UK equities. Due to the fact that stock market investing is risky, in the wake of the financial crisis, it is recommended for the funds managers to hold a well-diversified portfolio (including international diversification) to reduce risk as supported by the Capital Asset Pricing Model (CAPM) and the Modern Portfolio Theo ry (MPT). The funds manager, after analysing international market correlations in relation to the returns of various national markets due to difference in levels of economic growth and timings of business cycles, would allocate investments among these markets as a means of rebalancing their portfolios and reducing risks in favor of foreign equities (Rezayat and Yavas 440-458). In analysing the data provided, international equity portfolio diversification would be recommended based on the existence of low correlations among national stock markets and