Abstract
The aim of this project is to conduct risk assessment and return analysis on the investment vehicles in my portfolio. The investment vehicles chosen are Ford Motor, Walt Disney Company, Citigroup Inc., Wal-Mart Stores Inc., Time Warner Inc, Johnson & Johnson, US Treasury Bills, and Johnson & Johnson bond. The portfolio includes securities drawn from three categories that are the money market fund, corporate bonds, and shares. In the first scenario, the project tested the impact of novice asset allocation on return and risk in the sense that the investor allocates assets to the portfolio at own discretion. In this scenario, the analysis resulted in 13.6% returns and a beta value of 0.7968. The second scenario involves a risk-seeking attitude where the investor allocates most of the assets to the securities or investments with the highest returns. The analysis revealed that the return was 26.21% with a risk level represented by a beta value of 1.30928. In the last scenario, the investor is risk averse meaning that there is a high level of risk avoidance. The returns on this portfolio were found to be 6.90% while the beta value was found to be at 0.4485.
This project presents the risk assessment and return analysis on the investment vehicles in my portfolio. The portfolio includes securities drawn from three categories that are the money market fund, corporate bonds, and shares. The securities in the portfolio were carefully selected to include the items presented in the table below. The data collected on the securities includes the current price, the one-year target price, and the dividends (Finance.yahoo.com., 2016; Yahoo! Finance, 2016).
In the construction of the investment portfolio, various weights were selected. Asset allocation in the portfolio was based on the availability of funds as well as the investors feelings about the future of the company or asset selected. Notably, for all the assets in the portfolio, the investor focused on one-year period of maturity from the date of purchase and consequently, the rates provided all reflect the data for one year. The weights assigned to the various securities was presented as follows.
The return on the portfolio was computed based on the one-year expected price of the asset and consequently, the provided rates provide the actual return. The computation of the total actual return includes both the expected annual capital gains as well as the expected annual dividends (Finance.yahoo.com., 2016; Yahoo! Finance, 2016). Based on the weighting of the assets in the portfolio, the expected dividends, and the expected capital gains within one year, the expected to total return for the portfolio was computed as follows.
Based on the weight, actual return (capital gains plus dividends) and the weight of the security in the portfolio, the expected total return was found to be 13.646%. Notably, some of the securities in the portfolio may result in negative returns with the negative return majorly resulting from WMT. However, the diversification lowers the risk of getting an overall negative return.
In the next table below, the investor obtained the beta values for all assets in the portfolio. For Johnson & Johnson the investor obtained the beta values for both the shares and the bond set to mature on 08/15/2017. Beta is a measure of risk. A beta value of 1 means that the risk in the asset is equal to the market risk while a beta value of one means that the asset is less risky or that the risk is lower than the market in the risk. Using the beta values, the expected returns, and the weights of the assets in the portfolio, the average risk (beta) and return were computed as shown in the table below. The analysis of the return and risk values as shown by the 13.6346% and 0.79 respectively indicates that there is low risk in the portfolio hence it is highly unlikely that the returns will deviate from the value computed in the table below.
Portfolio revision is one of the most important investment strategies. In this particular case, the portfolio was revised to assign more assets to the high return performers. The revised portfolio is as show in the following table.
Using the new weights as highlighted in the table above, the investor conducted another risk assessment on the portfolio and at the same time assessed the weighted returns expected from the portfolio. The findings were as indicated in the table below.
The analysis of the revised portfolio indicates that the expected weighted average return stands at 26.21% while the average risk is 1.31. Consequently, the portfolio is more volatile than the market and the returns are expected to be more volatile. Nonetheless, the portfolio indicates the concept of high-risk-high-return.
Other than assessing the portfolio based on the high-return performers’ emphasis, the return was also revised to provide a perspective on the low risk securities. For a risk averse investor, more assets would be allocated to low risk securities as shown in the table below Finance.yahoo.com., 2016; Yahoo! Finance, 2016).
Summary of Findings
In summary, this project tested the relationship between risk and return. In the first scenario the project tested the impact of novice asset allocation on return and risk in the sense that the investor allocates assets to the portfolio at own discretion. This happens when a risk neutral person allocates assets in almost equal weights without considering the risk and the return. In this scenario, the analysis resulted in 13.6% returns and a beta value of 0.7968. The second scenario involves a risk-seeking attitude where the investor allocates most of the assets to the securities or investments with the highest returns. The implications of this are that the investor realizes high returns and at the same time takes high risk. The analysis revealed that the return was 26.21% with a risk level represented by a beta value of 1.30928. In the last scenario, the investor is risk averse meaning that there is a high level of risk avoidance. The returns on this portfolio were found to be 6.90% while the beta value was found to be at 0.4485. The continuum of risk then confirms that high returns come with high risk and low returns come with low risk.
In relation to the macroeconomic variables, the risk seeking and the risk neutral investors are more likely to focus on portfolio allocations that ensure a return higher that the prevailing interest rates and consequently they are able to get returns that enable them to fight of inflation. On the other hand, the risk averse investors are likely to suffer from the hit of high inflation as the returns are close to the prevailing interest rates in the market. However, the risk tolerance level varies from one person to the other meaning that every investor ought to choose the risk level that best suits them.
References
Finance.yahoo.com. (2016). FORD,MOTOR | Stock Prices | Quote Comparison | YAHOO! Finance. Finance.yahoo.com. Retrieved 30 June 2016, from http://finance.yahoo.com/quotes/FORD,Motor;_ylc=X3oDMTI2dWE2NjBkBGtleXcDRk9SRCxNb3RvcgRtaWQDbWVkaWFxdW90ZXNzZWFyY2gEc2VjA2dldHF1b3Rlc2J0bgRzbGsDbXVsdGlfcXVvdGU-
Yahoo! Finance. (2016). Citigroup Inc. Yahoo! Finance. Retrieved 30 June 2016, from http://finance.yahoo.com/q?s=C
Yahoo! Finance. (2016). Johnson & Johnson. Yahoo! Finance. Retrieved 30 June 2016, from http://finance.yahoo.com/q?s=JNJ
Yahoo! Finance. (2016). The Walt Disney Company. Yahoo! Finance. Retrieved 30 June 2016, from http://finance.yahoo.com/q?s=DIS
Yahoo! Finance. (2016). Time Warner Inc. Yahoo! Finance. Retrieved 30 June 2016, from http://finance.yahoo.com/q?s=TWX
Yahoo! Finance. (2016). Wal-Mart Stores Inc. Yahoo! Finance. Retrieved 30 June 2016, from http://finance.yahoo.com/q?s=WMT
