Introduction
The entire concept of both of these things is vital for an organization and the importance of the same thing cannot be derailed from any standpoint. In finance, the name of Financial Modeling is one of them, which has its own significance and importance. Theoretically, financial modeling is basically a task of building an abstract of representation of a real world and financial institution. Financial Model is usually known as a mathematical model represents the asset class of a financial based asset or a portfolio of a business or an individual . The essence of financial modeling is increasing day by day in number of countries of the world, as it is something related to the behavior of the financial market accordingly. The field of Portfolio management is yet another important field from the viewpoint of Financial Management and the provision of the same cannot be degraded from any angle. Portfolio Management is all about managing or building a certain portfolio of assets classes under which specific amount of investment could be included accordingly.
The main perspective of this assignment is to analyze the essence of Portfolio Management and recommend a perfect investment opportunity in all of the stocks related to three different financial markets, which particular are Financial Times Stock Exchange (FTSE-100), Standard & poor (S&P)-500 and Nikkei index -250 with potential worth of £10m. Apart from making a perfect portfolio, it is also required to compute Value at Risk (VAR) and back testing on the 90% and 99% confidence level in particular. In the next section, a small description of each of the index would be considered in the next section followed by the analytical framework.
Description of the Selected Markets
The financial Times Stock Exchange (FTSE-100) is basically a share of index in which 100 top listed companies of London Stock Exchange exist. The companies are those which have the largest market capitalization in particular. FTSE is known as the widely used stock indices of the world and it is regulated under the laws of the United Kingdom (UK). This particular index is maintained and the Group of FTSE. This particular index had seen number of ups and downs during their corporate moves. All of the financially sound and effective companies of the United Kingdom (UK) could be found in the index of FTSE-100. The index has a total market capitalization of £ 1,549 billion and it was the largest indexes of the United Kingdom (UK) and people are very much crazy for this particular index for investment .
Standard and Poor (S&P) – 500 is a stock market index of the United States. The total market capitalization of the index has around 500 large companies having common stock listed on the New York Stock Exchange (NYSE) or NASDAQ. S&P differs from other important indexes of the United States, because it is of the most integral markets from the viewpoint of the company . The float capitalization of the index is high and effective at the same time in particular. The total market capitalization of this particular index is US$ 14,199 billion which is comparatively on the higher side as compared to other indexes operating under the same country. This particular index is again very much effective and attractive for the individuals all over the world including the United States (US) as well, as most of the individuals and companies like to park their money in the stocks of the companies found under the index of S&P-500.
The Nikkei-250 Index more commonly known as Nikkei Index is basically a stock Exchange predominantly found in Tokyo. In fact, Tokyo Stock Exchange (TSE) is known as the Nikkei Index in particular. According to the size and market capitalization, it is again a good and effective stock exchange of the world. Due to high market capitalization, investors also found effective things from the viewpoint of investment are concerned. This particular index, though not as effective and powerful as S&P and FTSE, but the financial competitiveness of the same is n a higher place.
It is required to have a step by step approach to complete this particular assignment and it is vital to use each and every aspect relating to the same as well. Mean Return, Standard Deviation and forecasting are some of the major things on which the stance of the investment depends upon heavily in particular. In this particular section, all of these tools would have been used to consider the average movement and risk association with each of the stocks accordingly. Apart from this particular provision, VAR and Back Testing (BT) would also be considered accordingly and both of these tools are vital from the viewpoint of investment in particular. The pension fund which worth £10m in particular has to be categorized accordingly and effectively
Regulations also come in the place in particular and it is vital for the individuals to comply with the same in order to invest perfectly. The table below is showing the average index figures along with the average return rate as well, with standard deviation and forecasting based. The forecasted figure of all of these three indexes for the next three periods are mentioned below in the table form.
Obviously, no investor would like to have negative return, hence it is required to invest in those investment figures which in return give positive feedbacks for the investor. The potential funds are based upon the funds of Pension, amounting specifically to a level of £10m. It is also required to have one short and one long position in the stocks of the company. The investor has to think and take care of two things, one is that the return should be in line and should be normal as well, because abnormal and un-standardized profit is not at all effective from the viewpoint of investment in particular. Before making the portfolio of the selected amount, it is important to divide the proportion of the investment into three different stocks in particular. Back testing and Value at Risk computation would have been performed, it is vital to make the portfolio and analyze the amount of profit which would have been earned by the investor by making the portfolio and do the investment accordingly . In the next section, proportion of investment would have been categorized and divided accordingly along with investment stance like which stock should be short and which would be long. Let’s now move towards the same section.
Bifurcation of Investment Portfolio
Portfolio Return Analysis
Making a portfolio certainly is effective from the viewpoint of an individual, because it is something from which enhancement in the return would be directed and risk would be mitigated accordingly . Portfolio management is a perfect subject and it has many sides. In this section, the portfolio would be made on the basis of the basis of the invested money which is £10m. Both return percentage and value analysis would be performed in this particular section in particular.
Percentage Return Analysis
The table of the same is mentioned below after computation
According to the above mentioned analysis, it is found that the total investment return would be around 1.691% according to the current computation and allocating the money according to the same proportion. The portfolio risk is mentioned below, if investment would have been done according to the same bifurcation
Dollar Return Analysis
In this section, dollar investment return would have been performed accordingly and the computation of the same is mentioned below
The equity of £ 10 million would increased to a level of £ 10.169 million in a matter of one day, if investment could have been done in the same way and the dollar amount of risk associated with the same investment is
The equity of the investor may come on the level of £ 9.817 million, if things would not go in the favor of them
Value at Risk Computation (VAR)
Value at Risk (VAR) is one of the most effective and widely used risk management tools which have its own significance and importance in a broad nutshell. It is used to compute the highest amount which an investor can loose on a given portfolio at a given period of time.
References
Alexander, C. (1998). Risk Management and Analysis: Measuring and modelling financial risk. London: Wiley.
Danielsson, J. (2011). Financial Risk Forecasting: The Theory and Practice of Forecasting Market Risk with Implementation in R and Matlab. Paris: John Wiley & Sons.
Greg N. Gregoriou, C. H. (2010). The Risk Modeling Evaluation Handbook: Rethinking Financial Risk Management Methodologies in the Global Capital Markets. Miami: McGraw Hill Professional.
Malz, A. M. (2011). Financial Risk Management: Models, History, and Institutions. Chicago: John Wiley & Sons.
Pfaff, B. (2012). Financial Risk Modelling and Portfolio Optimization with R. New York: John Wiley & Sons.
