In portfolio management, a positively correlated portfolio suggests that when the price of one security goes up or down, the other security remains in lock step in the same direction. A positively correlated portfolio is effective in portfolio construction as this suggests greater stability in return (DCMS, Statman and Glushkov 2016).
The portfolio’s expected return is calculated as 1.8% for Ever shares and 1.2% for Kina shares. In addition to this, the risk of Ever shares stands at 0.497% and the risk of Kina shares is 0.381%.
|
R1 |
20% |
R2 |
15% |
|
Volatility (Ever Shares) |
15% |
Volatility (Kina Shares) |
20% |
|
Return (Ever Shares) |
1.80% |
Return (Kina Shares) |
1.20% |
|
Risk (Ever Shares) |
0.497% |
Risk (Kina Shares) |
0.381% |
Due to the increased volatility in the market Eddie is not able to experience a higher return in the present market. Moreover, with increased return for Ever shares the risk is also high. Therefore, there is an option for Eddie to explore other investment opportunities in shares of different market index.
The two main assumptions for the “capital asset pricing model” relies on competitiveness factor of the securities market and market dominated by risk averse investors. Despite of these two factors constituting the cornerstone of financial theory, however the modern development of CAPM takes into consideration various other specialized limiting assumptions. This is included with frictionless market condition without imperfections such as “transaction costs, taxes, and restrictions on borrowing and short selling”. As these conditions are not visible in a practical terms this model is often criticized. In addition to this, CAPM requires putting a limit to the assumptions which are associated to statistical nature of investor preference and securities return. Lastly, the model assumes that the investors will agree to the risk of security and performance as per common time horizon. Therefore, the assumptions in the CAPM are not only unrealistic but also to test of validity is not achieved only with usefulness of models prescription.
the theory of the efficient market hypothesis reflects all the associated information such as stocks and market assets. However, there are primary evidence of the efficient market hypothesis which shows that active investors to not outperform the market. Therefore, this statement is false as the risk adjusted the first from point of view of the significant anomalies in the market and interest rates (Blyth et al. 2016).
The active portfolio management is an approach used by brokers or fund managers to outperform a specific index such as Russell 1000 or AORD. On the other hand, a passive portfolio is a concept of index fund management which considers creation of portfolio track the returns on a particular market index or benchmark. The advantages of active portfolio management include:
Similarly, the two advantages of passive portfolio include:
The investors can adopt efficient portfolio management system by understanding the volatility of the portfolio. In addition to this, the investors need to understand the line which connects the efficient portfolios known as the efficient frontier. This will allow the investors to segregate portfolios into two divisions the one will be based on the portfolios which have maximum rate of return for a given level of risk and the other will have no expected return and high level of risk (Asness et al. 2014).
The two types of mutual fund classifications are stated with equity funds and bond funds.
The equity funds are generally presented with a large category of mutual funds with the objective of classifying funds as per long-term capital growth. Therefore, in portfolio management the equity funds are essential for identifying different types of treaties.
In a similar fashion, the bond funds refer to those mutual funds which are likely to be higher returns than the certificate of deposits. They have a special role in determining the risk-free rate in portfolio management (Performance 2014).
|
βa |
0.20 |
βb |
0.80 |
|
Risk Free Rate (Rf) |
12.50% |
35% |
|
|
Market risk premium (Rm1) |
10.00% |
Market risk premium (Rm2) |
10.00% |
|
Required rate of return |
12% |
14.910% |
The computation of the risk-free rate has been calculated with the use of what if analysis in excel. The goal seek approach is used to calculate the value of both asset A and asset B.
The calculation of the alpha is based on CAPM formula. The formula for this shown below as follows:
The alternative asset pricing model for CAPM can be directly depicted with Arbitrage pricing theory (APT). The expected return depends on several types of unspecified number of macroeconomic factors plus noise. The examples for the macroeconomic factors under this model can be included exchange rates, oil prices and changes in GDP.
“Expected return = a+hx + r factor: +b2 + r factor 2 +K +bn-r factor n + noise”
In this model, bp b2, .,bn is identified as the sensitivity the corresponding factors.
The “Fama and French Three Factor Model” considers the use of factors such as market efficiency, cost of capital and business risk.
Based on the behavioral finance, despite of the clear theories suggested in the modern portfolio concepts, the stocks are often traded at unjustified prices thereby investors making irrational decisions. In many situations, the modern theory does not take into consider factors such as knowledge distribution and market efficiency
|
Stock M |
Stock N |
|
|
Index model regression estimates |
3.5% +1.4 (rm=rf) |
3.5% +2.1 (rm=rf) |
|
Standard deviation on excess returns |
16% |
23.40% |
|
Rm |
14% |
14% |
|
σp |
16% |
23.40% |
|
rp-rf |
3.5% +1.4 |
3.5% +2.1 |
|
βp |
1.4 |
2.1 |
|
Sharpe Ratio |
1.26 |
0.87 |
|
Stock M |
Stock N |
|
|
Index model regression estimates |
3.5% +1.4 (rm=rf) |
3.5% +2.1 (rm=rf) |
|
Standard deviation on excess returns |
16% |
23.40% |
|
Rm |
14% |
14% |
|
σp |
16% |
23.40% |
|
rp-rf |
3.5% +1.4 |
3.5% +2.1 |
|
βp |
1.4 |
2.1 |
|
Treynor Ratio |
0.175 |
0.128 |
The Sharpe ratio aims to address the motion how well an equity investment portfolio performs as compared to risk-free investment. For instance, the common benchmark is used with risk-free investment as government treasury bills or bonds. On the other hand, Treynor ratio is based on measuring portfolio return for rate of return for risk-free investment. It aims to examine how well a portfolio is able to perform in the equity market as a whole.
The possible conflict in result due to both the methods can occur as for the preference given by the investor. For instance, if an investor is looking for comparing the portfolio return in terms of government bonds then it will look for results as per long-term government bond rate rather than comparing a certain stock with different market index. Therefore, in Treynor measure the performance measures are considered as per benchmarks of other markets which may not be referred by an investor (Management 2014).
Jensen’s Alpha is the measurement of risk-adjusted performance of a security as for the expected market return which is based on CAPM. The higher is the value of Alpha more a portfolio has earned above level predicted.
The market timing strategy is attended by various investors to predict the future price movements. This prediction provides an outlook for economic, fundamental and technical analysis factors.
|
NAV at the beginning |
3.52 |
|
NAV during the end |
3.32 |
|
Fund Distribution Rate |
$ 0.05 |
|
Rate of return for Aminvest Active Bursa Growth Fund |
$ (0.06) |
Based on the name of the fund, a portfolio will more likely have a lower expected return and standard deviation than its benchmark. This is due to the fact that fund distribution rate is $ 0.05, whereas the expected rate of return for the company’s only $(0.06).
It can be clearly seen that the investment objective was not able to outperform the benchmark as the fund distribution rate (benchmark) is higher than expected rate of return for “Aminvest Active Bursa Growth Fund”.
The mutual funds investment is subject to market risk therefore not having insights of right fund manager can prove to be a costly affair. The investors will be particularly cautious about the total amount of tax which needs to be paid on returns from the mutual funds.
|
FBM KLCI Index started |
1810 |
|
FBM KLCI Index closed |
1701 |
|
Fair value Rate |
$ 1.50 |
|
Trade Ended |
5% |
|
Holding Period Return |
6% |
|
Closing price of the ETF |
200 |
Three key differences between ETF and mutual fund are listed below are as follows:
References
Asness, C. et al. (2014) ‘Fact, Fiction, and Momentum Investing’, The Journal of Portfolio Management, 40(5), pp. 75–92. doi: 10.3905/jpm.2014.40.5.075.
Blyth, S. et al. (2016) ‘Flexible Indeterminate Factor-Based Asset Allocation’, Portfolio Management, 42(5), pp. 79–93. doi: 10.3905/jpm.2016.42.5.079.
DCMS, Statman, M. and Glushkov, D. (2016) ‘Classifying and measuring the Creative Industries’, Journal of Portfolio Management, 42(2), pp. 140–151.
Management, C. and Management, C. (2015) ‘Still Not Cheap?: Portfolio’, The journal of Portfolio Management, 41, pp. 108–120.
Management, T. E. P. (2014) ‘Project Portfolio Management’, Igarss 2014, (1), pp. 146–149. doi: 10.1007/s13398-014-0173-7.2.
Performance, P. (2014) ‘Management Science’, Management science(INFORMS), 18(12), pp. 1738–1756. doi: 10.1287/mnsc.2013.1836.
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