Introduction
Finance and accounts are two different fields from each other and both of these fields are important from different standpoints in particular. Accounting is the name of recording the day to day transactions while finance is the name of articulating the accounting data and utilize them at a place from where the likelihood of earning would be on a higher scale.
The field of finance is full of different concepts and models and among them, the name of investment management is one of them. Investment management is basically a concept in which the investment of an individual or a company would have been used and managed accordingly and effectively for the sake of development and enhancement. Investment and risk are the two sides of a same picture; hence any person cannot escape from risk factors while investing the money. Hundreds of concepts stride under the investment management, including efficient frontier (EF), Funds of Funds (FOF) and Capital Marketing Line (CML) and all of these concepts have their own significance and importance as far as their utilization is concerned.
The concept of EF and CML is one of the most effective ones from the viewpoint of an investment appraisal technique. Portfolio management has a usage of this particular thing in particular. The main perspective of this assignment is to make a portfolio of 6 different assets out of 12 assets and then analyze the EF and CML as well from the same table and chart. The data is of 19 years and have different asset classes as well, including the US Treasury bill (T-Bill).
Analytical Framework
Ans-1)
Obviously every investor required to park their money in such stocks which have the tendency to give back higher return in particular. Efficient frontier is generally referred as the basis of modern based portfolio theory. The concept is mainly proposed by Harry Markowitz. It can be identified as generating expected return to its highest altitude for provided risk level. In other words, number of portfolios with low risk intensity for defined anticipated return level. Therefore, set of portfolios that are placed below the efficient frontier are categorize as suboptimal, because they do not provide an adequate return in exchange of risk levels. Efficient portfolio frontier rights of the cluster are also considered as suboptimal because they have defined the rate of return on a greater degree of risk. However, the shape of effective frontier is bowed instead of linear. Moreover, a key to this concept is found in a variety of benefits. The composition of the efficient frontier over optimal combination tend to have many times better than sub-optimal portfolios, which are usually comprised on less diversified
It is a duty of a portfolio manager to select the most effective portfolio for the client’s investment which is less risky as well. Mentioned below are six assets which have been chosen for the same analysis
There are six different risky assets have been used in this particular analysis. This particular portfolio has a mean and standard deviation as well. Standard deviation usually used for computing the association of risk with a certain portfolio and it is computing the same in this particular analytical table. The mean of this particular portfolio having six different assets is 10.50% which is higher than that of 3 assets of the portfolio and lower than the other three ones. Apart from the mean expected return, there is a mean standard deviation as well; known as portfolio risk or standard deviation and this particular information is saying that the risk associated with this portfolio is 20%, which is quite higher. Apart from mean and standard deviation, there is yet another concept which is quite important in investment management is Correlation which used to analyze the factor of relevancy in different stocks. Mentioned below is the table of correlation which is computed the same thing
Ans-2-5-6)
The efficient frontier line and curve along with CML is mentioned below in table and chart form
Ans-3)
Sharpe Ratio
17.06 – 4 / 20 = 65.3%
Ans-4)
If risk would be 3% higher than most of the assets would breached the line of CML, while if the risk is 3% lower than it is under the line of CML, hence the portfolio would be riskier in the increment of the risk
Ans-7)
Portfolio management has an effective and amazing concept under its nose and it is one of the most effective ones. From this entire analysis, it is found that the utilization of EF and CML could be extremely vital for an individual or company in parking their money and in this assignment where 6 different assets have been selected, the optimization of the portfolio have been done with these two equation. Forecasting is important in this particular provision as well, as it may help the companies to analyze the EF and CML lines as well.
